
In domestic transactions, the under invoicing of sales and
over-invoicing of expenses ordinarily will be revenue
neutral in nature except in two circumstances having tax
arbitrage such as where one of the related entities is
◦ Loss making or
◦ Liable to pay tax at lower rate and the profits are shifted
to such entity

Transfer Pricing till A.Y. 2012-13 was applicable to Entities
having International transactions with their Associated
Enterprise

Honoring the Supreme Court ruling in case of CIT vs M/s
Glaxo Smithkline Asia (P) Limited expanded the ambit of
transfer pricing to Specified Domestic Transactions w.e.f. 1st
April,2013
Intent of Domestic TP-DTA & Tax Holiday Unit
Scenario 1
Particulars
Scenario 2
Co.A
Co.B
Particulars
Co.A
Taxed in India @
0%
Income from RP
Other Income
33%
Taxed in India @
0%
33%
150
-
Income from RP
225
-
300
600
Other Income
300
600
Expense to RP
-
150
Expense to RP
-
225
Other Expenses
300
300
Other Expenses
300
300
Profit / Loss
150
150
Profit / Loss
225
75
Tax
Total Tax for the
Group
By
-
50
50
shifting of expenses
Tax
Co.B
-
Total Tax for the
Group
25
25
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 has been introduced.
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%
Income from RP
100
-
Income from RP
150
-
Other Income
200
400
Other Income
200
400
Expense to RP
-
100
Expense to RP
-
150
Other Expenses
400
200
Other Expenses
400
200
Profit / Loss
(100)
100
Profit / Loss
(50)
50
-
33
Tax
Total Tax for the
Group
33
Tax
Total Tax for the
Group
-
17
17
By shifting of expenses fro a loss making company to a profit making company,
the group could reduce its tax liability by 16 for the current year, though the impact
will be reversed in future years given carry forward of losses.
Intent of Indian Transfer Pricing (TP) Regulations
Associated
Enterprise
(AE Co.)
Indian Co.
India
(Tax @ 33%)
Shifting of
Losses
Overseas
(Tax at Lower
rates, say 10%)
Tax Savings for the group -> Indian Govt. loses
 Applicability
Transaction covered under Section Applicability
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
Chapter VIA or Section 10AA
Profit based deduction
Any transaction
In any of the section
Any other transactions as may be
prescribed

Threshold

Shift of focus

How would you interpret the close connection ?

Fair Market Value can established using basic market evidence

Determination of Arm’s Length Price

Advance
Pricing
Agreements
domestic transactions
NOT
applicable
to
specified
Scope – Domestic Transactions
Tax holiday
undertakings covering :
• inter-unit transfer of
goods and services
Transactions with
entities having close
connection
Expenditure
incurred
between related parties
defined u/s 40A
Any other transaction
that may be specified
Aggregate
Transaction
value exceeds
Rs. 50 millions
in a financial
year
(Applicable
from
FY 2012-13)
Scope of Section 92BA
Inter unit transfer of goods & services by
undertakings to which profit-linked
deductions apply – Sub section (8) of
Section 80IA
Expenditure
incurred
between
related
parties
defined under
section 40A
Any other
transaction
that may be
specified
SDT
Transactions between undertakings, to
which profit-linked deductions apply,
having close connection Sub section (10)
of Section 80IA
10
Section
Tax Payers covered
Applicability of TP provisions on SDT
aggregating a value of more than
INR50 million
40A(2)
Substantial
Parties
Interested Expenses or payment made or to be made.
80A(6)
Enterprise claiming profit Intra Transfer of goods and services and
linked deductions from within the closed connected entities. ( i.e.
total income under chapter eligible business to non eligible business)
VI-A
80IA
Sub
Section
(8)
And (10)
Infrastructure developers
Telecommunications
service providers
Developers of Industrial
parks
Producers or distributors
of power
An enterprise with an
eligible business and close
connection with any other
person
The goods and services of an eligible
business transferred to any other business
carried on by the same taxpayer and vicea-versa, are to meet the arm’s length test.
(sub section 8) Intra Unit Transfer
a business transacted between a taxpayer
carrying on an eligible business transact
with a close connection, which results in
more than ordinary profits to the business, is
to meet the arm’s length test. (sub section
10)
Section
80-IAB
Tax Payers covered
Applicability of TP provisions on SDT
aggregating a value of more than
INR50 million
Developers of SEZs
Small Scale industry engaged in
operating Cold storage plant
Industrial undertaking in
industrially backward state as
mentioned in VIII Schedule (ex :
Jammu and Kashmir)
 Multiplex theaters and convention
centers
 Company carrying on scientific
research and development
 Eligible housing projects
 Eligible hospitals
80-IC /
80-IE
Persons with units in specified states
/ north-eastern states claiming
deduction
80-ID
Hotels located in districts with World
Heritage sites
10AA
Persons with income from SEZ units
The goods and services of an
eligible business transferred to any
other business carried on by the
same taxpayer and vice-a-versa,
are to meet the arm’s length test.
(sub section 8) Intra Unit Transfer
a business transacted between a
taxpayer carrying on an eligible
business transact with a close
connection, which results in more
than ordinary profits to the
business, is to meet the arm’s
length test. (sub section 10)
Section 92BA Analysed......
For the purpose of sec. 92, 92C, 92D and 92E
Section
92
Relevance
with
provisions of
Sec 92BA

: Computation of income having regard to ALP
92A : Meaning of AE

92B : Meaning of International transaction

92C : Methods of computation of ALP

92CA: Reference to TPO

92CB : Safe harbour rules

92CC : Advance Pricing agreement

92CD : Effect of TP agreement

92D : Maintenance of information and documents

92E : CA’s Report

92F : Definitions: Accountant, ALP, Enterprise, PE, Specified date,
Transaction*

* Sec 92F – Definitions does not define terms relevant for domestic TP transactions
13
Intra Unit Transactions
Expenses
Tax Holiday
3
2
FMV to ALP
4
1
5
6
Assessment
Accountant’s
Report
Identify the type of the transaction covered under SDT
Classification of transaction covered under SDT
(i.e.40A(2)(b), Intra Group goods and services, Within
Closely connected entities)
Compliance of Section 92D with Rule 10D. ( Maintenance
of Documentation which includes Transfer Study report,
MAM, PLI, Tested Party, Manner of determination of ALP)
Legal Compliance before due date of Filing return of
Income

To check evasion of tax through excessive or
unreasonable payments to relatives and 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

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


Expenditure paid or to be paid to related parties will require to be at arm’s length
Examples of related parties under section 40A(2)(b)
Payer
Receiver of Payment
Individual
• Relative of individual
Company
• Director of company or relative of the director
AoP/ HUF
• Member of AoP / HUF or relative of such member
Any
taxpayer
• Payment to a person who has substantial interest
• Payment to a director / partner / member / relatives of a person
who has substantial interest
• Payment to a company in which parent (more than 20% holding) has
substantial interest
• Payment to a person whose director/ partner/ member has
substantial interest
• Payment to a director/ partner/ member/ relatives of a person
whose director/ partner/ member has substantial interest
• Payment to a person in which entities have substantial interest
• Payment to a person in which my director/ partner/ member/
relatives have substantial interest
• Payment to any of director/ partner/ member/ relatives
Substantial Interest means beneficial ownership of shares with at least 20% voting
right or beneficial entitlement of at least 20% of the profits

Section 2(41) defines relative in relation to an individual to mean:
◦ Husband;
◦ Wife;
◦ Brother;
◦ Sister; or
◦ any lineal ascendant or descendant;

Means an enterprise –
◦ (a). Which participates, directly or indirectly, or through one
or more intermediaries, in the management or control or
capital of the other enterprises; or
◦ (b).
In respect of which one or more persons who
participate, directly or indirectly, or through one or more
intermediaries, in its management or control or capital, are
the same person who participate, directly or indirectly, or
through one or more intermediaries, in the management or
control or capital of the other enterprise.

Section 40A(2)(b) applies to payment made to the
assesse’s relative or an associate concern is liable
(Substantially Interested Parties)

Section 92A applies to transaction with AE directly
or indirectly or through one or more intermediaries
in the management or control or capital of the
other enterprise.
Transaction
Covered
A
B
D
A&B
C
E

A&C

A&D

A&E

B&C

D&E

C&D

B&E

22

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 can Arithmetic
mean
of
be treated as fair market comparable prices treated as
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



“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 five percent is permitted from 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)
Traditional
transaction
methods
Cost Plus Method (CPM)
Profit Split Method (PSM)
Transactional Net Margin Method (TNMM)
In case, more than one price is determined by MAM:
Apply Arithmetic mean
Range of + 5% of the arithmetic mean
Transactional
profit
methods
Section
Nature of Undertakings covered
80IA
Undertakings engaged in
•Developing, operating and maintaining, developing and operating
and maintaining infrastructure facilities
•Generation/ transmission or distribution of power
•Reconstruction/ revival of power generating plants
80IB
Undertakings located/ engaged in
•Industrially backward districts as notified;
•Scientific research & development
•Refining of mineral oil/ commercial production of natural gas
•Operating cold chain facility for agricultural produce
•Processing, preservation and packing of meat/ meat products or
poultry/ marine/ dairy products
•Operating and maintaining a hospital of specified capacity
80IC
Undertaking located in notified Centre/ Parks/ Areas in
•Sikkim
•Himachal Pradesh/ Uttaranchal
•North- Eastern states
80ID
Undertaking engaged in business of hotel/ convention centre in
specified areas/ districts
10AA
Undertakings having a Special Economic Zone unit
anti-abuse provision brought to check the excessive tax holiday
claims
 Generic framework of ‘More than ordinary profit’ was provided in
law to compute the excessive tax holiday claims
 To plug the loophole, it is now proposed to compute more than
ordinary profits through the ‘arm’s length price’ mechanism
Issues
◦ Eligible business will have to justify the ALP of the transactions
between the eligible unit/ business and any other person having
close connection

◦ The term “Close Connection” not defined
◦ Burden of the proving the “close connection” between the assessee
and other party is on TPO
Impact
◦ Loss of tax holiday claim in excess of arm’s length profits
◦ No corresponding adjustment allowed for other party for adjustments
made, if any, by the TPO for transactions falling under this category

Industries operating in SEZs

Infrastructure Developers

Infrastructure Operator

Telecom Services

Industrial Park Developers

Power Generations or Transmission






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. transaction with
Directors/CFO/CEO etc.. Section 40A(2)(b)
Payment made to key personnel of Group Companies. Section
40A(2)(b)
Payment made to relative of key personnel of the assessee/group
companies. Section 40A(2)(b)

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


Maintenance of detailed TP Documentation,
as specified in rule 10D demonstrating
compliance with the ALP
Filing an Accountants’ report (Form 3CEB),
certified by a Chartered Accountant with tax
authorities containing details of specified
domestic transactions
Default
Nature of penalty
In
case
of
a
post-inquiry 100-300% of tax on the adjusted amount
adjustment, there is deemed to
be a concealment of income
Failure to maintain documents
2% of the value of each international
transaction
or
specified
domestic
transaction
Failure to furnish documents
2% of the value of each international
transaction
or
specified
domestic
transaction
Failure to report a transaction in 2% of the value of each international
accountants report
transaction
or
specified
domestic
transaction
Maintaining
incorrect
documents
or
furnishing 2% of the value of each international
information
or transaction
or
specified
domestic
transaction
However, penalty for concealment of income shall not be levied if the taxpayer
demonstrates that price charged or paid has been determined in ‘good faith’ and
with ‘due diligence’
Type of payments/
transactions
• Salary and Bonuses paid to the
partners
• Remuneration paid to the
Directors
Challenges
• Benchmarking?
• Whether the limit as mentioned in
section 40 (b) would be the ALP?
• Benchmarking?
• Whether the limit as mentioned in
Schedule XIII would be the ALP?
• Transfer of land
• Rules defined by Local Authorities
(Jantri) as ALP?
• Joint Development agreements
• Benchmarking?
• Project management fees
• Benchmarking?
• Allocation of expenses between
• Whether these allocation would be SDT
the same taxpayer having an
– Sec 80-IA(10)?
eligible unit and non-eligible unit
• Definition of Related Party
• Directly v/s Indirectly
33
1. Transfer pricing provisions are not applicable in case where income is not
chargeable to tax at all.
[Amiantit International Holding Ltd., (2010) 322 ITR 678 (AAR)]
2.
Provisions of section 40A(2) are not applicable to a co-operative society.
[CIT vs. Manjara Shetkari Sahakari Sakhar Karkhana Ltd.(2008) 301 ITR 191
(Bom.)]
3. Payment made by holding co. to subsidiary co. is not covered u/s 40A(2)(b), as the
relationship does not fall under sub-clause (ii) nor under sub-clause (iv) of sec.
40A(2)(b).
[CIT vs. V.S.Dempo & Co. (P) Ltd. (2011) 336 ITR 209 (Bom.)
Note: In this decision, clause (vi) of s. 40A(2)(b) was not considered.
4. When a person commits an offence by not maintaining the books of accounts as
contemplated by section 44AA, the offence is complete. After that there can be no
possibility of any offence as contemplated by section 44AB and therefore, the
imposition of penalty is erroneous.
[Surajmal Parasmal Todi vs. CIT (1996) 222 ITR 691 (Gauhati)]
Note : This decision may be helpful in the context of sections 271AA, 271G and
271BA.
5.
Correlative adjustments - if excessive or unreasonable expenses are disallowed in
the hands of tax payer at time of the assessment then corresponding adjustment to
the income of the recipient will not be allowed in the hands of recipient of income.
Hence, it would lead to double taxation in India.
34

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?

Whether Government approval u/s 295, 297 of the Companies
Act would be relevant?

Whether close connection would be interpreted to mean the
criteria
mentioned
in
section
92A(2)
or
(Inconsistency regarding definition of related parties
40A(2)(b)

Does the limit of INR 50 million apply qua transaction or
aggregate of all transactions ?

If aggregate of International and Domestic transaction
exceeds INR 50 million, but the International Transactions are
below INR 10 million, Do we need to maintain documents
prescribe under Rule 10D? ( Reference Rule 10D(2)

Would claim of Depreciate comes under the ambit of
Domestic Transfer Pricing?

How are SDT defined?
◦ The following transactions with the
exceeding INR 50 million are covered
aggregate
value
 Expenditure for which payment is made or to be made to
specified domestic parties
 Transfer of goods or services to/from eligible business (
tax holiday) from/to other business ( non-tax holiday
undertaking)
 Business transactions between eligible business ( tax
holiday unit) and other person(s) producing more than
ordinary profits owing to close connection

Which tax payers covered under SDT?
◦ Any tax payer incurring any expenditure with specified
Domestic related parties are required to comply the
regulation

How do you define specified domestic related party?
◦ The domestic related party will inter alia include a director, a
relative of the director, a person having substantial interest in
the tax payer ( carrying not less than 20% of the voting
power) and fellow related parties where a single person has
substantial interest in two tax payers

Which are the illustrative list of SDT?
◦ Transaction between the specified persons and also between
the inter-unit transactions of taxpayers would be covered
e.g. normal operating transactions, allocation of costs, etc…

What are the compliance requirements for tax payers that
have SDT?
Tax payer that have specified Domestic Transaction would
need to do the following:
 Identify the nature of Transactions
 Maintain requisite information and documents as
prescribed
 Obtain and furnish a prescribed report from an
accountant in Form 3CEB

Applicability of OECD TP guidelines

Advance Pricing Arrangement

Benefit of range

Rule 10D and Form 3CEB requires modification to
harmonise their applicability in relation to inter-units pricing
and reporting of domestic transactions

Corresponding adjustment