25.1 Domestic Transfer Pricing provisions were introduced by Finance Act, 2012 based on the decision of Supreme Court in the case of Glaxo Smithkline Asia (P.) Ltd. Briefly, the Honourable Supreme Court in this decision had addressed a larger issue of whether Transfer Pricing provisions should be extended to domestic transactions. It mentioned that shifting of profits in such transactions, being domestic, would ordinarily be tax neutral. However, this would not be the case where one of the companies is making a loss (resulting in tax arbitrage); or if different tax rates are applicable to the assesses concerned. The Honourable Supreme Court had recommended empowering the assessing officer to apply any of the generally accepted methods to determine the Arm’s Length Price (ALP) in respect of such transactions. Further, it recommended maintenance of books of accounts and documents in such cases; as also obtaining of an audit report from a Chartered Accountant.
25.2 The transfer pricing provisions apply to specified domestic transactions. The specified domestic transactions are:
- Payments to related parties u/s. 40A(2)(b), and
- Where one party enjoys any kind of profit linked
Eg: deduction under S. 80IA.
The transfer pricing provisions apply only if aggregate transaction value exceeds Rs. 20 Crores.
25.3 These provisions increased the compliance cost in case of small businesses and burden of the tax payers considerably. Further it caused difficulties in case of transactions like managerial remuneration. It was difficult to find comparable transactions.
In order to reduce the compliance burden the Finance Bill proposes to exclude the payments made to related parties from the meaning of specified domestic transaction. [S. 92BA] Transactions where one party enjoys a tax holiday or deduction/exemption, still continue to be covered by the Domestic Transfer Pricing provisions.
This is a beneficial provision and reduces the compliance burden to a large extent where tax arbitrage was anyways to a minimal extent.