Introduction to Domestic Transfer Pricing
The Finance Act of 2012 introduced provisions for Domestic Transfer Pricing (TP), extending existing TP regulations for international transactions to certain domestic transactions termed as "Specified Domestic Transactions" (SDT), effective from the Financial Year 2012-13.
Under these regulations, if the aggregate amount of all such domestic transactions exceeds INR 20 crores in a financial year, taxpayers are required to structure their TP policies based on sound business rationale and commercial substance. They must also maintain robust documentation to justify transfer prices related to SDTs during audits conducted by revenue authorities.
To ensure objectivity in determining income from domestic-related party transactions and the reasonableness of expenditure between related domestic parties, section 92 of the Income Tax Act has been expanded to include SDTs. Section 92(2A) mandates that any allowance for expenditure, interest, allocation of costs, or income related to SDTs should be computed based on the arm's length price. However, section 92(3) specifies that this provision does not apply if such allowance for expense or interest under section 92(2) reduces taxable income or increases losses.
Specified Domestic Transactions
The term "specified domestic transaction" is defined under Section 92BA of the Income Tax Act. It includes various transactions such as:
Inter-unit transfers of goods and services by an undertaking, unit, enterprise, or eligible business to another business carried on by the assessee or vice versa, where consideration does not correspond to the market value on the date of transfer (as referred to in section 80A).
Transfers of goods or services between eligible businesses and other businesses, where consideration does not correspond to the market value of goods and services (as referred to in section 80-lA(8)).
Business transactions between the assessee carrying on eligible business and other persons (as referred to in section 80-IA(10)).
Transactions referred to in any other section under Chapter VI-A or section 10AA, to which provisions of section 80-IA(8) or section 80-IA(10) are applicable.
Business transactions between a company opting for section 115BAB and persons with whom the company has close connections.
Business transactions between a cooperative society opting for section 115BAE and persons with whom the cooperative society has close connections.
Any other transaction as may be prescribed.
However, these transactions are not considered specified domestic transactions if the aggregate value does not exceed INR 20 crores in the previous year.
The rationale behind Domestic Transfer Pricing is to prevent tax avoidance or evasion by taxpayers through related party transactions. For instance, companies may attempt to shift profits from entities taxed at higher rates to those with lower tax rates. To mitigate this risk, transactions between related parties, especially those eligible for lower tax rates under specific provisions like Section 115BAB for new manufacturing units, must be conducted at arm's length prices. This ensures fair taxation and prevents undue tax advantages from related party transactions.
Case Law That Leads to Introduction of Domestic Transfer Pricing in India
In the case of Commissioner of Income Tax v. Glaxo Smith Kline Asia (P) Ltd.[2], Hon’ble Supreme Court of India recommended the Government of India to amend certain provisions, i.e., sections 40(2) and 80-IA (10) of the Income Tax Act 1961, to empower the Assessing Officer to extend transfer pricing regulations to certain domestic transactions between related party enterprises.
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