What is Domestic Transfer Pricing?
Transfer Pricing provisions were earlier restricted to international transactions only but now it has extended to specific domestic transactions also with effect from 13th April, 2013.
Legal Definition of Domestic Transfer Pricing
Section 32 BA defines domestic transactions which are governed by the TP regulation which states that specified domestic transactions in case of the assessee mean any of the following transaction-
- Any expenditure to be incurred or to be incurred in connection with a payment made or to be made to a person referred to in section 40A (2)(b).
- Transactions referred to in section 80A.
- Any transfer of goods or provision of services as provided in subsection 8 of section 80 – IA.
- Any business transaction between the assessee and another person as referred to in subsection 8 of section 80 – IA
- Any transactions which have been mentioned under section under chapter VI-A or section 10AA, o a person to whom provisions of subsection 8 or subsection 10 of section 80 IA is applicable
- And where the aggregate of such transactions entered into by the assessee in the previous year exceeds 20 crores
- Any other transactions as may be prescribed.
Threshold Limit
The above provisions will only be applicable if the aggregate value of the turnover of the above mentioned transactions exceeds above 20 crores.
Applicability of Domestic Transfer Pricing
- Taxpayers cannot apply for transfer pricing to a specific domestic transaction to reduce the tax liability.
- Monetary threshold limit of Rs. 20 crores will be calculated according to the receipts and on the basis of aggregate payment to which these provisions apply.
- Definition of Related party includes expenses disallowed to cover the entities which have common beneficial ownership
- Transfer pricing is applicable to international transactions and to specific domestic transactions only. It specifically excludes Advanced pricing agreement provisions.
Concept of Arm’s Length Price (ALP)
The concept of ALP has also extended to specific domestic transactions only. ALP is denied as the price which is applied to the proposed to be applied in a transaction the assessed one and any other unrelated person.
Methods of Computing ALP
Flowing are the methods for computation of ALP-
- Comparable uncontrolled Price method- Under the CUP method, a price that is charged in an uncontrolled transaction between the comparable firms is recognized and evaluated with a verified entity price for determining the Arm’s Length Price.
- Resale Price method- This means its application looks to transactions between unrelated parties as a means to determine an arm’s length price for the intercompany controlled transaction under review.
- Cost plus method- It means it is based on markups observed in third party transactions. While it’s a transaction-based method, it is less direct than other transactional methods and there are some similarities to the profit-based methods.
- Profit split method- It evaluates whether the allocation of the combined operating profit or loss attributable to one or more controlled transactions under ALP.
- Transactional net margin profit- It compares the net profit margin of a taxpayer arising from a non-arm’s length transaction with the net profit margins realized by arm’s length parties from similar transactions.
- Such other methods may be notified as board- These are any other methods which are prescribed by the Board.
Documentation required
- Company related documents-
- Profile of the company
- Profile of the group companies
- Profile of the unit claiming tax holiday
- Profile of all the related parties.
- Transaction related documents-
- Agreements
- Invoices
- Pricing related correspondence such as emails, Letters etc.
- Price Related Documents-
- Terms of the Transactions
- Functional analysis specifying functions, risks and assets.
- Economic analysis containing method, selection and comparable benchmarking.
- Budgets and comparable.
- Other supporting documents cuh as official public reports by the government such as stock exchanges, and financial statements.
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