Section 40A(2)(b)

Report
Specific
Domestic
Transactions
CA HIREN D. SHAH
AHMEDABAD
EMAIL:
[email protected]
Introduction

TP was earlier limited to ‘International Transactions’

The Finance Act 2012, extends the scope of TP provision to ‘Specified Domestic
Transactions’ between related parties w.e.f. 1 April 2012

The SC in the case of CIT vs Glaxo Smithkline Asia Pvt Ltd [2010-195Taxman
35 (SC)] recommended introduction of domestic TP provisions

SDT previously reported/certified but onus on revenue authorities

Obligation now on taxpayer to report/ document and substantiate the arm’s
length nature of such transactions

Shift from generic FMV concept to focused ALP concept

These new provisions would have ramifications across industries which benefit
from the said preferential tax policies such as SEZ units, infrastructure
developers or operators, telecom services, industrial park developers, power
generation or transmission etc. Apart from this, business conglomerates having
significant intra-group dealing would be largely impacted
IMPLICATION POST - BUDGET 2012 FOR SDT
FMV
ALP
No method prescribed for
computing FMV
Six methods prescribed for
computing ALP
No documentation required to be
maintained
Contemporaneous documentation
required to be maintained
Other than reporting in tax audit
report, no statutory compliance
Accountant’s report signed by a CA
to be filed
Assessment done by the AO
Assessment done by the TPO
IMPACT
OF
DOMESTIC TRANSFER PRICING
Expenses
• Expenses paid by domestic companies to related parties will be challenged
• Corresponding adjustment not permitted for disallowed expenses; will lead to double
taxation
Transaction within
Company
• Company with multiple units and claiming tax holiday will be questioned on inter unit
transfers
• Authorities will attempt to reduce profitability of exempted unit for reducing the
quantum of deduction
Tax Holiday
Shift of Approach
• Companies declaring ‘More than ordinary Profits’ for tax holiday units will loose
excessive income-tax benefits
• Approach will shift from generic ‘Fair Market Value’ concept to Arm’s Length pricing
Compliance
• Heavy Compliance burden of maintaining:
• transfer pricing documentation and
• reporting of transactions (Form 3CEB)
Assessment
• Assessment / audit by specialized cell of TPO
Intent of Indian TP Regulations
(International transactions)
Shifting of Profits
India
Overseas
Associated
Enterprise
(AE Co.)
Indian Co.
Tax @ 32.45%
Tax @ lower rate
approx 10%
Shifting of Losses
Tax Saving for the Group – Loss to Indian revenue
Intent of Indian TP Regulations…
(Domestic transactions)
India
India
Shifting of expenses/losses
Indian Co.
Tax Holiday
undertaking
Tax Exemption
Related Enterprise in
Domestic Tariff Area
(DTA)
Tax @32.45%
Shifting of income/profits
Tax Saving for the Group – Loss to Indian revenue
Intent of Domestic TP–Domestic Tariff Area (DTA)
Scenario 1
Scenario 2
Particulars
Co.A
Co.B
Particulars
Co.A
Co.B
Taxed in India @
33%
33%
Taxed in India @
33%
33%
Sales to RP
100
-
Sales to RP
150
-
Other Income
200
400
Other Income
200
400
Purchases from RP
Other Expenses
Profit/Loss
Tax
Total Tax for the
Group
100
-
Purchases from RP
-
150
400
200
Other Expenses
400
200
(100)
100
Profit/Loss
(50)
50
-
33
Tax
-
17
33
Total Tax for the
Group
17
By shifting of expenses from a loss making company to a profit making company, the
group could reduce its tax liability by 16.
Intent of Domestic TP–DTA & Tax Holiday Unit
Scenario 1
Particulars
Scenario 2
Power
DTA
Particulars
Power
DTA
Taxed in [email protected]
0%
33%
Taxed in [email protected]
0%
33%
Sales to RP
150
-
Sales to RP
225
-
Other Income
300
600
Other Income
300
600
-
150
Purchases from RP
-
225
Other Expenses
300
300
Other Expenses
300
300
Profit/Loss
150
150
Profit/Loss
225
75
-
50
Tax
-
25
Purchases from RP
Tax
Total Tax for the
Group
50
Total Tax for the
Group
25
By shifting of expenses from a tax holiday unit(Power ) to a unit in the
Domestic Tariff Area, the group could reduce its tax liability by 25.
To avoid such cases, Domestic TP was introduced.
What is Specified Domestic
Transaction?
Payment made or to be made for
expenditure incurred with
domestic related parties
Expenditure incurred
between related parties
defined u/s 40A(2)(b)
Undertaking to which profit
linked deductions are
provided, covering:
 Inter-Unit transfer of goods
and services – 80 IA (8) &
 Transactions between
entities having close
connection and generating
more than ordinary profits –
80 IA (10)
Explanation
Aggregate
transactio
n value
exceed
INR 50
million in
a
financial
year
Section 80IA(8) – Any transfer of
goods/services between various
undertakings or units of the
assessee. Transfer at market value.
Onus on tax payer.
Section 80IA(10) – More than
ordinary profits derived from
closely connected persons for
claiming deduction to be brought
down to reasonable profits. Primary
onus on tax payer. Onus on tax
authorities as well
Any Allowance for an expenditure or interest or allocation of any cost or
expense or any income in relation to the specified Domestic transaction shall
be computed having regard to the arm’s length price
CONCEPT OF ARM’S LENGTH PRICE (ALP)
 Concept of ALP applicable for determining taxable income
arising from international transaction introduced in 2001, now
extended to SDTs
 ALP defined to mean a price which is applied or proposed to be
applied in a transaction between persons other than AEs, in
uncontrolled conditions
 Comparability and FAR fundamental to the concept of ALP

Comparison of conditions in a controlled transactions with
conditions in transactions between uncontrolled enterprises

Compensation usually reflects functions performed (taking
into account assets used and risks assumed)
 ALP concept usually relevant for transactions between “separate
enterprises”; may need to be applied by analogy to SDT
involving inter-unit transfer of goods/ services
WHAT



IS
ARM’S LENGTH PRICING?
“Arm’s length price” means a price which is applied or proposed to be
applied in a transaction in uncontrolled conditions
Arm’s Length price is determined using the Most Appropriate Method :
Methods
Comparability
Comparable Uncontrolled Price Method
‘Price’ of the transactions
Resale Price Method
‘Gross margin’ of company reselling products /
services to unrelated parties
Cost Plus Method
‘Gross margin’ of company selling manufactured
products / services to related parties
Profit Split Method
‘Splits profits’ between parties to transactions
based on economic parameters
Transactional Net Margin Method
‘Net Profit margin’ (Operating Profit) of ‘Tested
Party’
If more than one comparable price is obtained using above methods, then
the arm’s length price would be ‘Arithmetic Mean’ of comparable prices

Deviation of plus / minus three percent is permitted from arm’s length
price
FAIR MARKET VALUE

VS.
ARM’S LENGTH PRICE
Domestic Transfer Pricing usher shift from generic ‘Fair Market Value’
concept to Arm’s Length Pricing
Characteristic
Fair Market Value
Arm’s Length Pricing
Definition
The price which goods or A price which is applied in a
services would have fetched transaction in uncontrolled
or cost in the open market
conditions
Computation
Mechanism
No
specific
provided in law
Transaction Value
Any market pricing point Arithmetic
mean
of
can be treated as fair comparable prices treated as
market value
arm’s length price
Sample Size
One comparable may be
Require bigger sample size
sufficient to establish fair
for establishing arm’s length
market value
Deviation
No deviation permitted from Deviation of plus / minus
fair market value
three percent is permitted
mechanism Most appropriate method out
of five prescribed methods
DETERMINATION OF ARM’S LENGTH
PRICE-THE APPROACH
Benchmarki
ng Analysis
Function,
assets and
risk
analysis
Identific
ation of
SDT’s
Selection of
most
appropriate
method
Calculation
of Arm’s
Length
price
Methods for Determination of ALP
Price applied in a transaction between independent enterprises in
uncontrolled conditions
To be determined by applying the Most Appropriate Method,
being one of the following five methods
Comparable Uncontrolled Price (CUP) Method
Resale Price Method (RPM)
Cost Plus Method (CPM)
Traditional
transaction
methods
Any other method
Profit Split Method (PSM)
Transactional Net Margin Method (TNMM)
In case, more than one price is determined by MAM:
Apply Arithmetic mean
Range of + 3% of the arithmetic mean
Transactional
profit
methods
SIX METHODS TO DETERMINE THE
ALP OF THE TRANSACTION
Comparable Uncontrolled Price Method:

Comparison of price charged to a related party with
the price charged to independent third parties or price
charged between two independent parties under
similar circumstances.
Resale Price Method (‘RPM’):

This method is generally used in the case of
distributor or re-seller model with reference to gross
profit earned from such transactions.
Cost Plus Method:

CPM is used for examining transactions comprising
provision of services or manufacturing activities with
reference to gross profit earned from such
transactions.
Profit Split Method (‘PSM’):

It is used where transaction involves intangibles or
transaction is complex. In the Indian context, the use
of this method is very limited.
Transactional Net Margin Method (‘TNMM’):

The method examines net profit margin relative to an
appropriate base that a taxpayer realises from a
transaction with related party. This method is widely
used and the most preferred method.
Any other Method:

It can be any method which can help in determining
the arm’s length price (ALP) of the transaction.
STEPS
Determining the applicability of TP on SDT to a
company, undertaking or unit, considering economic
and legal criteria
Identification of domestic transactions covered under
SDT provisions of TP regulations
Designing of tax-efficient solutions and mitigating risk
of tax penalties
Compliance with new TP provisions applicable to SDT
by 30 November, 2013
Maintenance of documentation including, but not
limited to, group profiles, nature of transacting units,
related parties, transactions terms, agreements, inter
unit transfer policies and financials
KEY PROVISIONS OF SDT
 S. 40A(2)
 S. 80A(6)
 S. 80IA(8)
 S. 80IA (10)
LEGISLATURE
INTENTION BEHIND
INSERTION OF

To
check
SECTION 40A(2)
evasion
unreasonable
of
payments
tax
to
through
relatives
excessive
and
or
associate
concerns and should not be applied in a manner which
will cause hardship in bona fide cases.

AO is expected to exercise his judgment in a reasonable
and fair manner
REASONABLENESS
OF EXPENSES TO BE
JUDGES HAVING REGARDS TO

Fair market value of the goods, services or facilities for which
the payment is made, or

The legitimate needs of the business or Profession

The benefit derived by or accruing to the assesse from the
expenditure

The above view is expressed by Hon’ble Guj High Court in the
case of Coronation Flour Mills vs. Asst. CIT [ 2009] 314 ITR 1
TYPE OF TRANSACTIONS COVERED (ILLUSTRATIONS FOR
PAYMENTS MADE BY A COMPANY) …
Case 1 - Director or any relative of the
Director of the taxpayer – Section
40A(2)(b)(ii)
Case 2 - To an individual who has
substantial interest in the business or
profession of the taxpayer or relative of
such individual – Section 40A(2)(b)(iii)
Assessee
(Taxpayer)
Director
Substantial interest >20%
Assessee
(Taxpayer)
Relative
Mr. A
Mr. D
Mr. C
Mr. A
Relative
Covered transactions
Holding Structure
Mr. D
Relative
Mr. C
TYPE OF TRANSACTIONS COVERED (ILLUSTRATIONS FOR
PAYMENTS MADE BY A COMPANY) …
Case 4 – Any other company carrying on
business in which the first mentioned
company has substantial interest –
Section 40A(2)(b)(iv)
Case 3 – To a Company having
substantial interest in the business of the
taxpayer or any director of such company
or relative of the director – Section
40A(2)(b)(iv)
Assessee
(Taxpayer)
Assessee
(Taxpayer)
Substantial interest >20%
A Ltd
Substantial
interest
>20%
C Ltd
Substantial interest >20%
Director
Relative
Mr. D
Substantial interest >20%
A Ltd
Mr. C
Covered transactions
Holding Structure
B Ltd
TYPE OF TRANSACTIONS COVERED (ILLUSTRATIONS FOR
PAYMENTS MADE BY A COMPANY) …
Case 5 – To a Company of which a director has a substantial interest in the business of the
taxpayer or any director of such company or relative of the director – Section 40A(2)(b)(v)
Director
B Ltd
Mr. A
Substantial
interest
>20%
Relativ
e
Mr. C
Mr. D
Covered transactions
Holding Structure
Assessee
(Taxpayer)
(ILLUSTRATIONS
COMPANY)…
OF TRANSACTIONS COVERED
PAYMENTS MADE BY A
Case 6 – To a Company in which the
taxpayer has substantial interest in the
business of the company – Section
40A(2)(b)(vi)(B)
Substantial
interest
>20%
Assessee
(Taxpayer)
FOR
Case 7 – Any director or relative of the
director of taxpayer having substantial
interest
in that
person– Section
40A(2)(b)(vi)(B)
A Ltd
Substantial interest >20%
Assessee
(Taxpayer)
B Ltd
D Ltd
Mr C
Relative
TYPE
Substantial interest >20%
Covered transactions
Holding Structure
Mr B
DOMESTIC TP MAY EVEN APPLY TO
CROSS BORDER TRANSACTIONS



Generally,
Domestic
TP
covers
domestic
transactions. However it does not indicate that a
SDT should not be a cross border transaction.
It does not also mean that both parties should
necessarily be residents.
Example: Payment
covered u/s 40A(2)
to
a
non-resident
director
CATEGORIES OF ASSESSEE NOT
COVERED U/S 40A(2)

Person indirectly related circular No. 61 dated
July, 6 1968

Body of Individuals

Co-operative Societies

Trust
EXPENDITURE



Scope of section is restricted only to
disallowance of any expenditure incurred.
40A(2) cannot be applied in a case where no
expenses have been claimed as a deduction by
the assessee.
It does not embark upon measuring the
reasonableness of income earned by the
assessee for the related party transaction in
the nature of income not covered.
(sale at a lower price or trade discount)
NOTIONAL INCOME



International TP gives tax authorities authority to
impute notional income while it is not possible in
case of domestic TP.
Domestic TP may best lead to disallowance of
excessive expenditure as only expenditure is covered
by section 40A(2) of the Act.
Only certain capital expenditure covered (fully
claimed as deduction)
TAX
BURDEN, IF TRANSACTION NOT AT
X Ltd.
(non-tax
holiday)
X Ltd.
(tax holiday)
Sale at ` 120
v/s ALP i.e. `
100
Sale at ` 120
v/s ALP i.e. `
100
Sale at ` 80 v/s
ALP i.e. ` 100
X Ltd.
(tax holiday)
ALP
Y Ltd.
(non-tax
holiday)
Disallowance of ` 20 to Y Ltd
[40A(2)(b)]
Y Ltd.
(non-tax
holiday)
Double Adjustment
Tax holiday on ` 20 not allowed to X Ltd
– [80IA(10)] (more than ordinary profits)
Disallowance of ` 20 to Y Ltd [40A(2)(b)]
Y Ltd.
(non-tax
holiday)
Inefficient pricing structure – reduced
tax holiday benefit since sale price is
lower than ALP
S.80A(6) & S.80 IA(8)
 SDT provisions apply to business transactions/ transfers referred to
in section 80A, 80IA(8), 80IA(10), 10AA, Chapter VI-A provisions
Section 80A(6) and Section 80IA(8) require adjustment to tax
holiday profits where
• Goods and services of eligible business are transferred to any
other business carried on by the same taxpayer and vice versa
• Consideration for such transfer as recorded in the accounts of
eligible business does not correspond to market value of such
goods/ services
• In such cases, tax authorities/ taxpayer required to recompute tax holiday claim by reference to ALP of such goods/
services
Overlap between 80A(6) and 80IA(8) not of
much consequence
• Is in the nature of notional adjustments for determining
profits eligible for tax holiday
• Applies to all tax holiday claims under Chapter VI-A/ Section
10AA
• Onus on tax payer to establish that goods and services
transferred at market value.
Section 80 IA(8) vis-à-vis Section 80 IA(10)
Difference
Section 80 IA(8)
Section 80 IA(10)
Deals with
Internal transfer of goods External
transfers,
i.e.
and services
transactions with other parties
Applicability
Application of this section Application of this section
is automatic.
requires the AO to form an
opinion that the transaction has
been ‘arranged’ by the assessee
for showing higher profits in the
eligible business
Assessing
Officer’s Role
AO needs to prove only
whether
the
recorded
values of the transfers is
at market value or not and
accordingly, determine the
eligible profits
Here, AO is required to prove
both the fact that the profits
shown by the eligible business is
inflated
as
also
the
motive/intension of the assessee
to inflate such profits.
Other Sections under Chapter VI-A......to which
s. 80-IA(8) or (10) are applicable
80-IA
Income from Infrastructure, Telecommunication, Industrial Park & Power
sector etc.
80-IAB
Income of an undertaking or enterprise engaged in development of SEZ
80-IB
Income from certain Industrial undertaking and Housing Projects etc.
80-IC
Income from certain Industrial undertaking set up in Sikkim, HP...etc.
80-ID
Income from hotels etc in Delhi, Faridabad and other specified districts.
80-IE
Income from eligible business undertaking in North Eastern States
Section 80IA (8) & 80IA (10) – Deduction in respect of profits and
gains from industrial undertaking or enterprise engaged in
infrastructure development, etc.
80IA (8)
80IA (10)
Inter-unit transaction of goods or services
• Business transacted with any person generates more
than ordinary profits
• Owing to either close connection or any other reason
Applicable where transfer is not at market
value
Applicable to tax holiday units earning more than
ordinary profit
Onus on tax payer
• Primary onus on taxpayer
• Onus on tax authorities as well


No guidance on the meaning of close connection
To align ordinary profits with arm’s length price. For example:
ALP of 5 comparable companies OP/TC
Mark-up of the tax holiday entity
OP/TC
Arithmetic mean = 15%
30%




OP/ TC of 30% considered to be at arm’s length by the TPO
Under 801A(10) the AO states that the profits are more than ordinary
Solution: Defend price or evaluate alternate methods (other then profit based)
Impact of non-charging of services/ costs to tax holiday undertaking
Close connection
• The language used in Section 80IA (10) states that “owing to the close
connection ……………. the course of business is so arranged”.
• However, the ‘close connection’ used in Section 80 IA(10) has not been
defined in the Act.
• Hence, for the purpose of this section, close connection is only a method
of ascertaining as to whether there is any arrangement made by the
assessee for inflating the eligible profits.
• But one cannot presume the existence of close connection or possibility of
arrangement for earning more than ordinary profits.
• Unlike Section 40A(2)(b), 92A, even though the scope of Section 80IA (10)
has been left wide and open to cover any transaction, as long as the AO
cannot substantiate that the course of business has been so ‘arranged’,
owing to whatever reasons, Section 80 IA (10) can not be invoked.
Close connection?
Particulars
AS-18
40A(2)(b)
92A(2)
Voting Power
>50%
>=20%
>=26%
Direct or indirect
holding
Both
Direct
Both
Directors
Key Managerial
Personnel
Directors
Not covered
Key Suppliers
Specifically excluded
Not covered
More than 90%
supplies
Comparative Analysis
Section 40A(2)(b)
Section 80 IA (10)
Substantial Interest is defined
under the Act.
No guidance provided for
closely connected persons
SDT will not be applicable on
any payment made to step
down
subsidiaries
for
providing goods or services
SDT will be applicable for any
transactions between company
and its step down subsidiaries
carrying on eligible business
MEANING OF SPECIFIED DOMESTIC TRANSACTION

Means
Transaction covered under
Applicability
Section
clause (b) of sub section (2) of
Section 40
Any expenditure
Sub section (6) of 80A
Computing Section
( Determination of ALP)
Sub section (8) of Section 80IA
Profit based deduction
Any transfer of goods or services within
units – Intra Units
Sub section (10) of Section 80IA
Profit based deduction
Any business transacted within closely
connected entities
In any of the section
Any other transactions as may be
prescribed
KEY DIFFERENCES IN THE PROVISIONS
RELATING TO DOMESTIC TP AND
INTERNATIONAL TP
TYPES OF TRANSACTIONS COVERED:

International TP inter alia covers both income
and expenditure transactions while Domestic
TP covers transactions of expenditure only ie
transactions covered u/s 40A(2).

As regards other transactions falling under
sections 80A(6)/ 80-IA(8)/ 80-IA(10)/ 10AA of
the Act specified for Domestic TP purposes,
both expense or profit from transactions are
covered.
SHAREHOLDING CRITERIA FOR
APPLICABILITY OF TP PROVISIONS


International
TP
provisions
prescribe
a
shareholding criteria of 26% for applicability of TP
while under Domestic TP a beneficial owner of
shares carrying not less than 20% of voting power or
beneficially entitled to share not less than 20% of
profits shall be treated as a person covered u/s
40A(2).
Indirect shareholding is covered under International
TP while clarity is not there in this regard in case of
Domestic TP.
MOST LIKELY
EFFECTED INDUSTRIES..

Industries operating in SEZs

Infrastructure Developers

Infrastructure Operator

Telecom Services

Industrial Park Developers

Power Generations or Transmission
MOST LIKELY TRANSACTIONS






UNDER
SCANNER
OF
SDT
Interest free Loans to Group Companies Sub section 8 of
Section 80IA
Granting of Corporate Guarantees/ Performance Guarantees by
Parent Company to its subsidiaries Sub section 8 of Section
80IA
Intra-group purchase/ sell/ service transactions Sub section 8
of Section 80IA
Payment made to key personnel e.g.
Directors/CFO/CEO etc.. Section 40A(2)(b)
transaction
with
Payment made to key personnel of Group Companies. Section
40A(2)(b)
Payment made to relative of key personnel
assessee/group companies. Section 40A(2)(b)
of
the
CRITICAL ISSUES……..

Provisions applicable only to expenditure where payment is
made or to be made

Does this include capital expenditure? – Section 40A(2)(b)

Does this include transactions without consideration? –
Section 80IA(8) & 80IA(10)

Does threshold apply to the amount recorded in the Books of
Account or Amount determine as per ALP?

Wide coverage and goes beyond the related parties covered
under AS-18

Whether Government approval u/s 295, 297 of the Companies
Act would be relevant?
CRITICAL ISSUES……..

Applicability of OECD TP guidelines

Advance Pricing Arrangement

Benefit of range

Corresponding adjustment
SHOULD
CAPITAL EXPENDITURE BE CONSIDERED
UNDER PROVISIONS OF
SEC 92BA?
1
DTP provisions cover payments for „any
expenditures‟ – which would mean capital as
well as revenue expenditure.
Further, the Revised ICAI Guidance Note
illustrates that purchase of tangible or
intangible property qualifies as SDT.
2
Judicial precedents suggest that capital
expenditure payments are not covered
under section 40A(2)(b).
DTP provisions intended for expenditure
covered under section 40A(2)(b), capital
expenditure may be excluded.
DIFFICULT TO ESTABLISH TRANSACTIONS AT ALP

Commission to relatives of the directors/ partners

Salary paid to the relatives of the directors/Partners

Remuneration to the directors

Extra Purchase Price and Interest foregone to relatives

Good sold at lower than market price if bona fide

Higher Purchase Price than rates prevailing in the market


Interest paid to sister concerns at rate higher than normal
rates
Hire Charges of Machinery or Rent paid for use of Immovable
property
DOMESTIC TP- KEY ISSUES
INDIAN COMPANY HAVING BOTH SDT AS
WELL AS INTERNATIONAL TRANSACTIONS

When an Indian company is having both international
transactions as well as SDT, whether SDT are required in
the following scenarios:
a)
When the value of aggregate of international transactions
and SDT is less than INR 5 crores.
When the value of aggregate of international transactions
and SDT is more than INR 5 crores, but value of SDT is
less than INR 5 crores.
b)

The taxpayer would need to report only international
transactions and not SDT if the aggregate value of SDT is
less than INR 5 crores.
BENCHMARKING OF DIRECTOR’S
REMUNERATION



Domestic TP provisions cover expenditure under section
40A(2) of the Act, which includes payments to ‘any’
directors.
Fees payable to a director depends on factors such as
director’s roles-responsibilities, experience, size and area of
operation of company etc..
Any kind of payment such as salary, sitting fees,
commission, various allowances to any director be it a
comprehensive package to a chairperson or sitting fees to
independent director will all be covered under Domestic
TP.
REFERENCE TO TRANSFER PRICING OFFICER
(TPO) WITH RESPECT TO TRANSACTIONS
COVERED UNDER DOMESTIC TP


In case of international TP, there is a set of process for
reference to the TPO.
However, as stated earlier in this note, there is yet no
legislation in relation to Domestic TP.
COMPLIANCE
REQUIREMENTS
What documentation would be required?
Entity Related
Price Related
Entity Related
Price Related
Transaction Related
Transaction Related
•
Profile of Industry
•
Transaction terms
•
Agreements
•
Profile of group
•
•
Invoices
•
Profile of related
parties
Functional
Analysis
(functions, assets
and risks)
•
Pricing related
correspondence
(letters, e-mails,
fax, etc.)
•
Economic
Analysis (method
selection,
comparable
benchmarking)
•
Forecasts,
budgets,
estimates
TAXPAYER WOULD NEED TO COMPLY
WITH THE FOLLOWING:



Maintain and keep information and documents in
relation to such transactions as statutorily required.
Obtain and file an accountant’s report in respect of
such transactions along with his return of income.
All existing TP compliance requirements, mandatory
documentation, TP audits (assessments) and penalty
provisions would be applicable, though provisions have
yet not been legislated for TP audits for SDT.



10th June 2013: CBDT, vide Notification No. 41
amended the Income Tax Rules, 1962 10A to 10E and
included SDT as regards application of various
methods, comparability etc.
“The Rules” now include the definitions of the terms
‘Associated Enterprise’ and ‘Enterprise’ in relation to
SDT.
The new form 3CEB now includes SDT.
DOCUMENTATION REQUIREMENTS


In case of SDT, documentation is required where
aggregate value exceeds INR 5 Crores.
In case of International TP, detailed documentation
is not required if aggregate value of transactions is
less than INR 1 Crore.
New Accountants Report – Form 3CEB
• The new Form 3CEB (‘the Form’) contains 25 clauses requiring
disclosure of the details of the various international transactions and
specified domestic transactions.
• The Form is broadly divided into 3 parts.
‒ Part A deals with general information about the taxpayer
‒ Part B is in relation to International transactions and
‒ Part C deals with Specified domestic transactions
• This new Accountants Report has to be signed by a Chartered
Accountant and submitted to the Tax Department before the due date
of filing return of income
Issuance of Accountants Report in Form 3CEB :
Timeline is before 30 November 2013
APA SAFE HARBOUR AND DRP
APA - No
• APA framework will apply only to international transactions and
not to SDT
Safe Harbour
• Safe Harbour provisions are not applicable to transactions
covered under Domestic TP.
DRP - Yes
• Eligible assessee as defined under Sec 144C means any person
in whose case the variation of total income arises as a
consequence of TPO‟s order u/s 92CA(3)
Penalty Implications
Impact
Quantum of Penalty
Sec 271AA
•Failure to keep and maintain Transfer Pricing
documentation
•Failure to report such transaction which is
required to do so
•Maintaining or furnishing incorrect information
or documents
2% of value of each international
transaction
Section 271G
•Failure to furnish / submit any information /
document to the transfer pricing officer
Penalty
2% of value of international
transaction for each such failure
Section 271BA
•Failure to furnish accountant’s report in Form
No. 3CEB
INR 100,000
Section 271(1)(c)
•Transfer pricing adjustment – Concealment of
income or furnishing inaccurate particulars of
income
100-300% of amount of tax sought
to be evaded on concealment of
particulars of income or furnishing
inaccurate particulars of such
income

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