Domestic Transfer Pricing in India

Applicability of Domestic Transfer Pricing (“TP”) provisions was earlier restricted to International Transactions only. And, with effect from April 1, 2013, the scope of Domestic Transfer Pricing provisions extended to “Specified Domestic Transactions (“SDT”).

With the applicability of Domestic transfer pricing provisions on Specified Domestic Transactions, it is the responsibility on the shoulder of the taxpayer to report / document and substantiates the arm’s length nature of such transaction.

Domestic Transfer pricing regulations were extended to include transactions that entered into with domestic parties or by an undertaking with other undertakings of the same entity for the purpose of section 40A, Chapter VI-A, and section 10AA. All the compliances requirements relating to Domestic transfer pricing documentation, including accountant’s report, etc. equally implied to specify domestic transactions as they do for international transactions amongst the enterprises. However, keeping in mind to reduce the compliance burden, the scope of applicability of domestic transfer pricing has been relaxed by excluding the reporting of expenditure in section 40A under the ambit of SDT provisions.

Prior to the introduction of domestic transfer pricing, tax officer had the power to re-compute tax holiday who are eligible to go for profit if undertaking makes more than ordinary profits as in last of arrangements with closely connected persons or otherwise.

In the case of inter-unit transfer of goods or services, tax officer/taxpayer allowed to determine tax holiday profits based on FMV of goods/ services. Thus, no specific methodology was directed for disallowance/tax holiday profit adjustment and it was important to consider making TP provisions applicable to aforesaid transactions.

There are two counts where tax arbitrage happens in India viz. tax holidays and accumulated losses. Hence, the main objective of introducing the domestic transfer pricing provisions in India is to deal with the tax arbitrage possibilities in India arising out of differential taxes and accumulated losses that makes concern.