domestic transfer pricing

June 14, 2013CPE Committee of the ICAI

By:CA. Gaurav Garg

Meaning of Transfer Pricing Arm’s Length Principle Approach to Profit Adjustment Applicability on Specified Domestic Transaction Compliance Transfer Pricing Documentation Transfer Pricing Methods Accountants Report

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Mechanism or exercise through which price for transfer or say transfer price, of, tangibles, intangibles, services, capital financing etc. is computed.

Mechanism to compute an arm’s length price is given in section 92C of Act read with Rule 10B and 10C.


Section 92(2A) “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.”

Principle Prices set for a transaction between related parties should for tax purposes be derived from prices which would have been applied by unrelated parties in similar transactions under similar conditions in the open

market.


Broadly there are two approaches to profit adjustments:

Global formulary apportionment approach Transfer pricing adjustment approach


A India

A China

A UK

A India

A China

A UK

A India

A China

A UK

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Transfer Pricing provisions to apply to the ‘Specified Domestic Transactions’ if the aggregate value exceeds

five crores

92BA. For the purposes of this section and sections 92, 92C, 92D and 92E, "specified domestic transaction" in case of an assessee means any of the following transactions, not being an international transaction, namely:—(i) any expenditure in respect of which payment has been made or is to be made to a person referred to in section 40A(2)(b) –

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Section 40A(1)◦ Applicability restricted to the computation of income under

the head “Profits and gains of business or profession” Section 40A(2)

◦ Applicable on expenditure in respect of which payment has been made or it to be made

◦ Expenditure in respect of goods, services or facilities Q & A

◦ Interest free loan given to related party◦ Corporate guarantee without any charge◦ Goods sold at lower value◦ Capital expenditure


This provision is applicable only on “expenditure” and not on “income”.

Provisio to section 40A(2)(a)“Provided that no disallowance, on account of any expenditure being excessive or unreasonable having regard to the fair market value, shall be made in respect of a specified domestic transaction referred to in section 92BA, if such transaction is at arm's length price as defined in clause (ii) of section 92F.”


(ii) any transaction referred to in section 80A

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Undertaking/ unit / enterprise / eligible

businessAny other business

Assessee

Goods/ Services

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(iii) any transfer of goods or services referred to in sub-section (8) of section 80-IA

12

Undertaking/ unit / enterprise / eligible

businessAny other business

Assessee

Goods/ Services


(iv) any business transacted between the assessee and other person as referred to in sub-section (10) of section 80-IA

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Eligible business with more than ordinary profits

AssesseeIndependent

tax payer

Close Connection

Any other reason


(v) any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable; ◦ 10AA - Special provisions in respect of newly established Units in

Special Economic Zones.◦ 80IAB - Deductions in respect of profits and gains by an

undertaking or enterprise engaged in development of Special Economic Zone.

◦ 80IB - Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings.

◦ 80 IC - Special provisions in respect of certain undertakings or enterprises in certain special category States

◦ 80ID - Deduction in respect of profits and gains from business of hotels and convention centers in specified area.

◦ 80IE - Special provisions in respect of certain undertakings in North-Eastern States


(vi) any other transaction as may be prescribed

and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of five crore rupees.


Example:During FY 2012-13, A Ltd. entered into following transactions with its related parties:(a) Salary paid to Directors : Rs. 6 million(b) Purchases from related party : Rs.25 million(c) Sales to related party : Rs.35 million(d) Loan taken from related party : Rs.100 million(e) Provision for interest on loan taken: Rs.10 million(f) Purchase of capital asset : Rs.15 millionAlso A Ltd. as two units and one of the unit is a Chapter VI-Aunit claiming tax deduction, following transactions in relation

to same:(g) inter-unit transfers : Rs.20 million(h) Allocation of common expenses : Rs.10 million


Value of Specified Domestic Transaction(a) Salary paid to Directors : Rs. 6 million(b) Purchases from related party : Rs.25 million(e) Provision for interest on loan taken: Rs.10 million(g) inter-unit transfers : Rs.20 million

Total : Rs.61 million

As value of specified domestic transaction is 6.1 crore i.e. more than threshold limit of 5 crore, transfer pricing provision would be applicable on these transactions.


As per section 92(3), transfer pricing provision are not applicable if:

“The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or sub-section (2A) or the determination of the allowance for any expense or interest under sub-section (1) or sub-section (2A), or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2) or sub-section (2A), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction or specified domestic transaction was entered into.”


Transfer pricing provision on specified domestic transactions are applicable from FY 2012-13 / AY 2013-14.

Taxpayer must compute an arm’s length price of specified domestic transaction as per the methods prescribed under section 92C.

Burden of proof is on the taxpayer to establish the arm’s length price and to maintain related documents.

Must obtain a report under Form 3CEB (till now no separate Form as been prescribed for specified domestic transaction) from a Chartered Accountant and file it before tax authorities within due date of filing of return of income.

Due date for filing tax return would be 30 November for a taxpayer on whom transfer pricing provisions are applicable.

Tax payer must submit the transfer pricing document to the tax authorities, within 30 days of the receipt of notice from the department.


Penalties◦ Non maintenance of documents, fail to report transaction,

maintain or furnishes an incorrect information or document – 2% of the value of controlled transaction – Section 271AA

◦ Non filing of Form 3CEB – Rs.100,000/ - Section 271BA◦ Failure to furnish information or document to tax

authorities – 2% of the value of controlled transaction – Section 271G


Relevant provisions relating to transfer pricing documentation is given under Section 92D of the Act read with Rule 10D of the Rules.

Section 92 D of the Act read with Rule 10E of the Rules

◦ Should be prepared on contemporaneous basis

◦ Should be kept and maintained for 8 years from the end of the relevant assessment year

◦ No fresh documentation required for continuing transactions unless there is some significant change which can have impact on pricing


Refer section 92D of the Act read with Rule 10D of the Rules

Types of Documents

Enterprise - wise

Transaction specific

Computation related


Enterprise-wise documents◦ Ownership structure of the taxpayer◦ Profile of the Group◦ Name of Associated Enterprises, address,, legal status,

country of tax residence, ownership linkage and business ◦ Business of the taxpayer, description of industry


Transaction-specific documents◦ Description of transaction◦ Functional Asset & Risk Analysis◦ Industry / market condition, forecasts/ budget, financial

estimates◦ Uncontrolled transactions and comparability analysis


Computation – related documents◦ Most appropriate method◦ Computation of arm’s length price◦ Assumptions, policies and price negotiation◦ Transfer pricing adjustment


OECD Guidelines

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TP Methods

Indian Regulations

CUP Methods

Resale Price Method

Cost Plus Method

Profit Split Method

Transactional Net Margin Method

CUP Methods

Resale Price Method

Cost Plus Method

Profit Split Method

Transactional Net Margin Method


In general◦ Comparable Uncontrolled Price (“CUP”) Method compare

prices.◦ Resale Price Method (“RPM”) compares gross margins.◦ Cost Plus Method (“CPM”) compares profit mark-ups on

costs.◦ Profit Split Method (“PSM”) refers to the (total) profits from

transactions and splits them among the parties based on the level of contribution.

◦ Transactional Net Margin Method (“TNMM”) analyses net profit in relation to an appropriate base, such as costs, sales or assets.

◦ Other Method (Rule 10AB) takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction.


Section 92 E“Every person who has entered into an international transaction or specified domestic transaction during a previous year shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed”

Applicable on all type of Assessee who has entered into specified domestic transaction

Value of Specified domestic transaction should not be less than 5cr in aggregate

Accountant means Chartered Accountant in practice Specified date shall have the same meaning as assigned to

“due date” in Explanation 2 below sub-section (1) of section 139 i.e. 30th day of November of the assessment year


As per the Guidance Note of ICAI on Section 92E:◦ Para 9.9 & 9.10 - Ensuring completeness of the listing of

international transactions is the responsibility of the taxpayer. CA should obtain MRL from the taxpayer.

◦ Para 9.12 – CA should go through the records maintained by the taxpayer and match the same with documents prescribed however CA is not responsible for the content of the transactions and documentation maintained by the taxpayer.

◦ Para 9.13 - If any document is not maintained, then the accountant should suitably qualify his report or disclose the same in his report depending upon the facts and circumstances of each case.


As per the Guidance Note of ICAI on Section 92E:◦ Para 9.17: The accountant must limit his scope of work and the

review procedures to the extent certified in Form No.3CEB. For e.g. in the Annexure the method which has been used to determine the arm’s length price needs to be stated. In this context the accountant is only required to ensure that the method stated as being used to determine the arm’s length price by the assessee has actually been used and it is not the accountant’s responsibility to ensure that the method so used is the most appropriate method as prescribed by the Board.


CA. Gaurav GargCA. Gaurav GargJJGarg Economic Advisors Pvt. Ltd.Garg Economic Advisors Pvt. Ltd.

Email: [email protected]: [email protected]: +91 98999 94934Mobile: +91 98999 94934Landline: 011 – 47094934Landline: 011 – 47094934

:011 - 65394934:011 - 65394934www.jgarg.comwww.jgarg.com


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