Transfer Pricing on domestic transactions Presentation

Transcript
1. Finance Bill, 2012Applicability of Transfer pricing regulation on Domesticrelated
party transactions
2. Applicability of Transfer pricing regulation on Domestic Empowers tax
department to re-compute the income of a taxrelated party transactions payer eligible
for certain tax incentives based on fair market value, under section
10AA/80IA/80IB/80IC.The Union budget 2012 (UB) has extended the gamut
oftransfer pricing regulation to domestic firms. Therefore, transfer However, the law
does not provide any method to determinepricing regulation will be applicable to
specified domestic reasonableness of expenditure or fair market value to re-
computetransactions that these firms get into with their sister company the income of
such transactions.from same group.The Supreme Court in the case of CIT Vs Glaxo
SmithKline Asia (P) Objective of amendmentLtd, in its order has, after examining the
complications which arisein cases where fair market value is to be assigned to
transactions The application and extension of transfer pricing regulations tobetween
domestic related parties, has suggested that Ministry of domestic transactions would
provide objectivity in determination ofFinance should consider appropriate provision
to make Transfer income from domestic related party transactions and
determinationPricing regulations applicable to certain related party domestic
reasonableness of expenditure between related domestic parties. Ittransactions. will
create legally enforceable obligation on assesses to maintain proper documentation.
However, extending the transfer pricingThe tax law, as it stands today, empowers the
tax office to: requirements to all domestic transactions will lead to increase in
compliance burden on all assessees which may not be desirable. Disallow
unreasonable expenditure incurred among domestic group companies (or expressed as
related party transactions), Applicability of amendment under section 40A(2)(b); and
3. Accordingly the Finance Bill proposes to extend the applicability of certainty as the
tax payer is not entitled for APA on domesticthe transfer pricing provisions to all the
above referred domestic transactions.transactions i.e. This amendment will take effect
from April 1, 2013 and will, Taxpayers operating in Special Economic Zones (under
Section accordingly, apply in relation to the assessment year 2013-14 and 10AA of
ITA); subsequent assessment years. Taxpayers having domestic transactions with
certain related parties [under Section 40A(2) of ITA]; and Impact of Amendment
Taxpayers claiming deductions for undertaking specified These new domestic transfer
pricing provisions would have business activities [under Section 80A, 80- IA etc of
ITA]. ramifications across industries which benefit from the saidThe tax authorities
can recompute the income (based on fair preferential tax policies such as SEZ units,
infrastructuremarket value) under these sections, of the undertaking to which
developers or operators, telecom services, industrial parkprofit linked deduction is
provided if there are transactions with the developers, power generation or
transmission etc. Apart from this,related parties or other undertakings of the same
entity. The business conglomerates having significant intra-group dealingtransfer
pricing provisions in respect of domestic transaction are would be largely impacted.
 The IT industry which gets taxapplicable to transactions that will exceed threshold of
Rs 5 crore. incentives under Section 10AA will come under this ambit as they also
transact with their units that are not a part of such schemesUnder the proposed
amendments the transfer pricing officer will (such as STPI units). There is now a
requirement to maintain also examine payments made to directors and computation of
documentation to prove arms length pricing, however, for those income and allocation
of expenses between related party who are able to demonstrate business being
conducted on an undertakings claiming tax holiday. Whilst on one hand the arms-
length basis, these provisions will not harm them proposals increases the compliance
burden of the tax payer and, on the other, tax authorities do not allow the tax payer to
obtain
4. DOMESTIC WORRIES* Arms length pricing of domestic related party
transactions;* Five transfer pricing methods for determining arms length price;*
Entities claiming tax holiday with super-normal profits to comply with TP laws;*
Taxpayers to maintain mandatory documentation for related party transactions;
Contact details:* Taxpayers will have to file Form 3CEB along with their tax return; *
Domestic transactions to be assessed by transfer pricing officer S.P.Nagrath & Co.,
instead of assessing officer. A-380 , Defence colony , New Delhi -110024 Email -
rashi@spnagrath.com/ nandita@spnagrath.comConclusionThese amended transfer
pricing regulations will not be limited to just the large groups any more. Many mid-
sized groups, partnership firms,Hindu Undivided Families (HUFs) and even
individuals in smaller citieswill now have to adhere to the TP rules. This will lead to
an increase in the administrative and compliance burden for the taxpayer in respect of
such transactions and a focused examination by the tax authorities.