Section 92F(ii) of the Income Tax Act, 1961 defines arm’s length price to mean a price –
Which is applied, or proposed to be applied in a transaction
This implies that the arm’s length price can be applied to an existing transaction or may relate to a future transaction;
Transaction is between person other than AEs
The person should not be either : –
- Associated enterprise
- Deemed Associated enterprises as per Section 92A;
Transaction is entered in uncontrolled conditions
The conditions under which the transaction has taken place, should not have been designed or suppressed in a manner, so that certain predetermined results are obtained.
Arm’s Length Price (“ALP”) provides a benchmark against which transactions between Associated Enterprise can be compared.
Note : –
The provisions relating to application of arm’s length price are not applicable where such application results in reduction of income or increase in losses for tax purpose in India (“Base Erosion Concept”).
DETERMINATION OF ALP UNDER SECTION 92C – [RULE 10B]
The methods prescribed for determination of arm’s length price in relation to an international transactions, are also applicable to determine the arm’s length price for specified transaction, namely : –
- Comparable Uncontrolled Price (‘CUP’) method;
- Resale Price Method
- Cost Plus Method
- Profit Split Method
- Transactional Net Margin Method
- Any other Method
MOST APPROPRIATE METHOD – [RULE 10C]
Rule 10C(1) provides that the most appropriate method shall be the method : –
- Which is best suited to facts and circumstances of each particular international transaction, and
- Which provides the most reliable measure of an arm’s length price in relation to the international transaction, as the case may be].
Rule 10C(2) specifies the factors to be taken into account in selecting the most appropriate method :-
- The nature and class of the international transaction ;
- The class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises;
- The availability, coverage and reliability of data necessary for application of the method;
- The degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions ;
- The extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions;
- The nature, extent and reliability of assumptions required to be made in application of a method.
SUCH RULE HAS NOW BEEN MADE APPLICABLE FOR SPECIFIED DOMESTIC TRANSACTIONS AS WELL.
INFORMATION AND DOCUMENTS TO BE KEPT AND MAINTAINED UNDER SECTION 92D [RULE 10D] : –
As per Rule 10D(1), every person who has entered into an international transaction shall be required to maintain certain information and documents. However, there is an exemption from maintenance of information and documents , where aggregate value of international transaction is Rs. 1 crore or less.
Such information and documents should also be kept and maintained for specified domestic transactions. However, there is no exemption limit available in case of specified domestic transactions, although given that the transaction would qualify as an SDT, only where the aggregate transaction are more than 20 crores, this rule is indirectly applicable to the SDT as well.
REPORT FROM AN ACCOUNTANT TO BE FURNISHED UNDER SECTION 92E : –
Every person who enters into specified domestic transactions during a previous year, is required to obtain a report from a chartered accountant, and furnish such report on or before due date of filing of return of income in Form No.3CEB.
Non applicability of Domestic Transfer Pricing to payment made to related persons under Section 40A(2)(b) – AMENDMENTS MADE BY THE FINANCE ACT, 2017
The existing provisions of Section 92BA provided that any expenditure for which payment is required to be made to related persons under Section 40A(2)(b) were also considered as specified domestic transaction, and were required to be benchmarked, where TP provisions were applicable.
Where an Indian company, which does not have any tax holiday, makes payment to another company/person, who is also a non -tax holiday undertaking having the same tax rate, payment from Indian company to the other person, does not result in any tax arbitrage, as both the deduction to the Indian company for expense, and taxation as income in the hands of the recipient, is at the same tax rate. Hence the price of such transaction, does not result in overall tax loss/gain to the Indian Government. The domestic TP provision, had increased the compliance burden of the assesse in such cases.
With effect from AY 2017-18, with a view to reduce the domestic Transfer Pricing compliance burden, payments under Section 40A(2)(b) are specifically excluded from Section 92BA. This implies, that provisions of specified domestic transaction, will now be applicable only if one of the entities involved in the transaction, is claiming profit linked deduction (i.e., Section 80-IA, 80-IB, 80-IC, 10AA, etc).
Such amendment has given relief to taxpayers which were liable to domestic Transfer Pricing even when both the related parties were taxable at same rate of 30% and there was no shifting of profits in order to save tax of overall group.
EXAMPLE : –
ICO and ICO1 are part of same group concern, i.e., both are related parties.
SITUATION 1 : Transaction at fair value
SITUATION 2 : Transaction at more than fair value
In both the situations the overall tax incidence comes out to be same even when there is transfer of goods from ICO1 to ICO at more than fair value. With effect from AY 2017-18, such transactions would not be considered as specified domestic transactions since none of the entities are claiming profit linked deduction.`
EXAMPLE : –
Indian company (ICO) paid salary of Rs 30 crores to its director during the PY 2016-17. Analyse, whether such payment would be considered as specified domestic transaction ?
SOLUTION : –
Payment made to director would be considered as payment to related person under Section 40A(2)(b). However, with effect from AY 2017-18 payments under Section 40A(2)(b) are specifically excluded from Section 92BA. Thus, provisions of specified domestic transaction would not apply in this situation.