Transfer Pricing Study Circle - · PDF fileParticulars (Ordinary Situation) Co. X (SEZ) Co. Y (DTA) Income 500 1000 Income from related party 100 - Expenses 300 800 Expense to related

Domestic Transfer Pricing -Basic Provisions &

Issues

Natwar G. Thakrar

Friday, 7th November, 2014

Transfer Pricing Study Circle

1

Overview

1. Genesis of DTP Provisions

2. Brief overview of SDT provisions

3. Documentation

4. Accountants Report

5. Issues under SDT

2

Genesis of DTP

Provisions

Extension of Transfer Pricing Provisions to Specified Domestic Transactions

– The Finance Act 2012, extended the scope of the TP provisions introduced in April, 2001 to

Specified Domestic Transactions ‘SDT’ [defined in Sec 92BA] to Persons U/s. 40A(2)(b)

(Related Parties) / Eligible business (Tax holiday undertakings) w.e.f. 1 April 2012

Genesis for the provision

– Under existing provisions the onus was on revenue authorities to prove FMV. The provision

was arbitrary and insufficient as no methodology was prescribed to determine FMV.

– The SC in the case of CIT vs Glaxo Smithkline Asia Pvt Ltd [2010-195 Taxman 35 (SC)]

recommended introduction of domestic TP provisions.

“In order to reduce litigation, we are of the view that certain provisions of the Act, like s.

40A(2) and s. 80-IA(10), need to be amended empowering the AO to make adjustments to

the income declared by the assessee having regard to fair market value of the transactions

between the related parties. The Assessing officer may thereafter apply any of the

generally accepted methods of determination of arm’s length price, including the

methods provided under Transfer Pricing Regulations.”

Genesis of DTP Provisions

4

SC’s powers to make recommendations:

– C. Ravichandran Iyer v. Justice A.M. Bhattacharjee 5 SCC 457 (SC):

“The role of the judge is not merely to interpret the law but also to lay new

norms of law and to mould the law to suit the changing social and economic

scenario to make the ideals enshrined in the Constitution meaningful and real.

The society demands active judicial roles which were formerly considered

exceptional but now a routine.”

– Justice M. Hidayatullah in “Highways and Bye lanes of Justice (1984) 2

SCC (Journal) 1 at p. 5:

“The first principle to observe is that the wisdom of the law must be accepted. A

little incursion into law making interstitially, as Holmes put it, may be

permissible. For other cases the attention of Parliament and /or government can

be drawn to the flaw”

Genesis of DTP Provisions

5

Particulars (Ordinary Situation) Co. X (SEZ) Co. Y (DTA)

Income 500 1000

Income from related party 100 -

Expenses 300 800

Expense to related party - 100

Profit/ Loss 300 100

Tax rate applicable 0% 32.45%

Tax - 32.45 (100*32.45%)

Particulars (Planned Situation) Co. X (SEZ) Co. Y (DTA)

Income 500 1000

Income from related party 200 -

Expenses 300 800

Expense to related party - 200

Profit/ Loss 400 -

Tax rate applicable 0% 32.45%

Tax - -

How Tax Arbitrage Between Related Parties Work?Illustrative Example

6

Coverage by DTP Provisions

All payments to Specified Persons as per Section 40A(2)

Purchase of goods / services

Management fees / royalties

Interest payments on loans taken from Related Parties / guarantee fees paid to

related parties

Purely domestic transactions - Managerial Remuneration, payment of rent,

equipment hire etc.

Cost allocations

Specific Transactions for Tax Holiday Taxpayers

Transfer of goods and services between tax holiday unit and another unit

Any business transacted with any person, where such business produces more than

ordinary profits eligible for tax holiday; owing to ‘close connection’ or any other

reason

7

Obligation now on taxpayer to report and substantiate the arm’s length

nature of the transactions

Computation of ALP only by application of any of the six prescribed

methods, being the most appropriate method

Excessive Payments to related parties U/s. 40A(2)(b) discouraged

Inter unit transfers/ transaction with outsiders of tax holiday

undertakings resulting in to shifting of profits to qualifying units at

non arm's length sought to be curbed

Obligation to maintain documents as prescribed under Rule 10D is

mandatory

Implications of DTP Provisions

8

Brief Overview of

SDT provisions

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”

• Therefore, in relation to Specified Domestic Transaction (SDT), the provision

covers:

– Allowance for an expense or interest

– Allocation of cost or expense [including cost contribution arrangements - s.92(2)]

– Any income

• The Chapter permits adjustment to income favorable to the revenue on item to

item basis

• The Chapter does not permit downward adjustment or set-off of one item

against another or corresponding adjustment in the hands of other party

10

2nd Limb Any transaction covered under

Section 80A [Inter-unit

transfer of goods & services under

s.80A(6)]

3rd Limb - Inter unit transfer of goods &

services by undertakings to which profit-linked

deductions apply –s.80IA(8) – Overlaps with

80A

4th Limb Transactions

between undertakings, to

which profit-linked deductions

apply, having close connection

–s.80IA(10)

5th Limb Any transaction

referred to in any other sections of Chapter VIA or 10AA to which s.80IA(8)/(10)

apply

6th Limb Any other

transaction as may be specified

by CBDT

1st Limb Expenditure

incurred between related parties defined under

s.40A(2)(b)

6 Limbs of

S.92BA

Scope

of

s.92BA

11

Particulars Nature of

transaction

With Position up to FY

2011-2012

Position from FY

2012-13

S. 40A(2) Expenditure Related Parties Excessive or

unreasonable

expenditure having

regard to the Fair

Market Value

Excessive or

unreasonable

expenditure having

regard to arm’s

length price

S. 80A(6) [in relation to

Ss.10A/10AA

/10B/10BA]

Income or

Expenditure

Between different

business units of the

same tax payer

Consideration as

recorded in the

accounts does not

correspond to

Market Value

Arm’s Length Price

S.80IA(8) Income or

Expenditure

Between different

business units of the

same tax payer

Fair Market Value Arm’s Length Price

S. 92BA Analysed

Particulars Nature of

transaction

With Position up to FY

2011-2012

Position from FY

2012-13

S. 80IA(10) Profits Close Connection

producing more than

ordinary profits (in

view of AO ?)

More than ordinary

profits

Arm’s Length Price

Chapter VIA,

S.10AA

(SEZ Units)

Profits Between Units or

Profits earned by the

eligible business unit

More than ordinary

profits

Arm’s length price

S. 92BA Analysed

No guidance on the meaning of “close connection”.

What if the assessee bonafide believes that his

transactions with closely connected person are fair?

Computation of Arm’s length price by applying the ‘Most Appropriate Method

(MAM)’ (Section 92C read with Rule 10B) out of Six prescribed Methods

Mandatory & onerous contemporaneous documentation requirements (S. 92D)

The taxpayer shall obtain & furnish auditor’s report under s. 92E of the ITA.

The statute requires information / documents in relation to SDT if the value of SDT

exceeds INR 5 Cr.

Burden of Proof shifted to taxpayer

Stringent Penal Consequences on Non-compliance coupled with TP adjustments

S. 92BA Implications

14

Sr.

No.

Nature of default Section Penalty

1 a) Failure to maintain prescribed

information/ Documents

271AA 2% of transaction

value

(b) Failure to report any such

transaction or

(c) Furnishing incorrect information

2 Failure to furnish information/

documents during assessment

u/s 92D

271G 2% of transaction

value

3 Adjustment to taxpayer’s

income during assessment

271(1)(c) 100% to 300% of tax

on successful

adjustment amount

4 Failure to furnish accountant’s

report u/s 92E

271BA INR 100,000

S. 271- Penalty Implications

15

Payer / assessee Payee

Individual Any relative

[Defined in Sec. 2(41) to mean husband, wife, brother, sister, lineal ascendant or

descendant of that individual] Definition of Relative u/s 56(2) is not relevant

Company Any Director or relative of such Director

Firm (includes LLP) Any Partner or relative of such Partner

AOP / HUF Any member or relative of such member

Any Assessee Any individual having substantial interest in the business of the assessee or relative of such

individual

Any assessee A Company, Firm, AOP, HUF having substantial interest * in the business of the assessee

Or any director, partner, member

Or relative of such director, partner or member

Or (inserted vide Finance Act, 2012) any other company carrying on business or

profession in which the first mentioned company has substantial interest

*Entitled to not less than 20% Profit share or Beneficial owner of shares entitled to not less than 20% of voting rights

Section 40A(2)(b) – Relationships

17

Section 40A(2)(b) – Illustrative Chart

A

B C

D E

A & B Yes

A & C Yes

A & D ?

A & E ?

D & E No

Transactions covered ?

* The FA 2012 has extended the coverage to relationship of common parent/ holding company where holding is =>20%.

B & C Yes*

Whether the ‘beneficial ownership’ covers derivative

relationship? For example, if A holds more than 50% in B and

B holds more than 50% in D, can A be regarded as having

substantial interest in D?

Relative, Director, Partner, Member, holding =>20% etc.

Section 40A(2)(b)- Beneficial Ownership

SBPL (Mauritius)

SB Plc UK

Horlicks(UK)

SBAP(Assessee)

SBCH(India)

CIT v. Glaxo SmithKline Asia (P) Ltd. (2010)

Taxmann 35(SC) before SC on account of which S.

40A(2)(b) was expanded

• Expnanatory Memorandum to Finance Bill 2012 –

“In view of the circumstances which were present in

the case before the Supreme Court, there is a need to

expand the definition of related parties for purpose of

section 40A to cover cases of companies which have

the same parent company.

……………

………………

It is further proposed to amend the meaning of related

persons as provided in section 40A to include

companies having the same holding company”

The reference to ‘parent’ and ‘holding’ company in

the Explanatory Memorandum supports that the

Legislature has understood the concept of

‘beneficial ownership’ under s. 40A(2)(b) to be the

same as the concept of ‘control’ under Companies

Act and accounting standards.

‘Beneficial ownership’ referred in S. 40A(2)(b) is

restricted to direct shareholding relationship.

However, this relationship may amount to ‘close

connection’ 19

SKBI(Luxemburg)

Beneficial Ownership – Glaxo SmithKline

Example

Documentation

Documentation Requirements

Entity related Price related Transaction related

• Ownership structure of

Indian entity

• Profile of group (AEs)

• Business description of

Indian entity

• Overview of industry

• Transaction terms

• Functional analysis (functions, assets and risks)

• Economic analysis (method selection,

comparable benchmarking)

• Forecasts, budgets, strategies, estimates

• Record of uncontrolled transactions taken for

Comparability Analysis

• Agreements

• Invoices

• Pricing related

correspondence

(letters, emails etc)

• Details of external/

internal CUPs

Other Supporting Documents [Rule 10 D(2)]

Analysis performed to evaluate comparability of Uncontrolled transactions with international transactions

Methods considered and selection of MAM with explanations

Actual working carried out for determination of the arm’s length price

Assumptions, policies, price negotiations which have critically affected determination of arm’s length price

Adjustments, if any & other relevant information 21

Identification of intra-group

Transactions

FAR Analysis (Understanding the Business

Model)

Identification of Comparable Transactions

Adjustment for material differences

Selection of Most Appropriate Method

(MAM)

Determination of ALP

Documentation

Report U/s. 92E

Tax Return filing

TP Assessment

Identification of Related Parties

Steps in Transfer Pricing

ProcessSelection of Profit

Level Indicator (PLI)

22

• Preparation

of project

plan • Search strategy

• Access to local

& global

database

• Analysis of

internal

comparables

• Judicious

identification of

arm’s length

range

• Understand

existing

costing

mechanism

• Determination

of billing

methodology

Pre-project

planning

Stage 2Stage 3

Stage 4

Functional

analysis -

Information

gathering

Comparable

data /

Industry

Analysis

Economic

Analysis

• Interviews

• Questionnaires

• Discussions with

Management

• Characterisation

of each entity

• Agreement

reviews

Stage 5

• Consultation with

management

• Finalization of

Transfer pricing

documentation

Issuance of

Transfer Pricing

Documentation

Stage 1

Key to dos before finalizing

Documentation

23

Functions Assets Risks

Research & Development Product intangibles Business risks

Purchasing Manufacturing intangible Market risks

Manufacturing Property Manufacturing risk

Assembling and Packaging Marketing Intangibles Foreign exchange risk

Warehousing and Logistics Loans & Advances Inventory risk

Engineering Guarantees Credit risk

Quality Control Research & Development risk

Labour Management,

TrainingWarranty risk

Marketing

Sales & Distributions

After Sales Services

Elements of FAR Analysis

24

FAR Analysis

Pricing

Strategy

Activities performed

Risks assumed

(Debtors, Currency, Market)

Assets

employed

(Infrastructure,

Intangibles)

An assessment of:

• Operations of group companies

• Their management and ownership characteristics

• Economic factors impacting business

25

What comes out of FAR Analysis ?

FunctionalAnalysis

Criteria forComparability Understanding of

where and howvalue is added

Compliance withdocumentationrequirementsPlatform for

economic analysis

Appreciation ofthe potential for

change

26

Functional

AnalysisContract Manufacturer Full- Fledged Manufacturer

Functions

Research & Development -

Purchasing

Manufacturing

Assembling and Packaging

Warehousing and Logistics

Engineering

Quality Control

Labour Management, Training

Marketing -

Sales & Distributions -

After Sales Services -

Risks

Business risks

Market risks (volume)

Manufacturing risk

Foreign exchange risk ?

Inventory risk

Credit risk

Research & Development risk -

Warranty risk -

Assets

Product intangibles -

Manufacturing intangible ? ?

What comes out of FAR Analysis ?

27

Accountants Report

Accountants Report- Contents

Form 3CEB

Part A-

Clause 1 to 9Part B-

International

Transactions

Clause 10 to 20

Part C-

Specified Domestic

Transactions

Clause 21 to 25

AnnexureReport

29

• Clause 21 – List of associated enterprises with whom the taxpayer has entered

into specified domestic transactions

• Clause 22 – Transaction in nature of payment of any expenditure to person

referred to in section 40A(2)(b)

• Clause 23(A) – Transfer/rendition of any goods or services from/by eligible

business of the taxpayer to any other business

• Clause 23(B) – Acquisition/ availment of any goods or services by eligible

business of the taxpayer from another business of the taxpayer

• Clause 24 – Any business transacted by an eligible business

• Clause 25 – Any other transaction

Part C- Specified Domestic Transactions

30

A Ltd(manufacturing company)

P LtdManufacturing

company

R LtdTrading

company

Q LtdService

provider

Related party as per 40A(2)(b)

Purchase of RM Interest paid on loan Reimbursement of expenses

Purchase of packing material Commission expenses paid

Transportation charges paid Rent paid for use of premises

Managerial remuneration to

Director A

Director B

A Ltd will report all the above transactions under clause 22 of form 3CEB since transactions with related party as per section 40A(2)(b)

Clause 22 – 40A(2)(b) payments

31

Clause 22: Has the assessee entered into any specified domestic transaction (s) being any expenditure

in respect of which payment has been made or is to be made to any person referred to in section

40A(2)(b)? (Reporting for A Ltd.)

Sr.

no

Name of the person

with whom the

specified domestic

transaction has

been entered into

Description of the

transaction

Total amount received/receivable or paid/

payable in the transaction

Method used

for

determining

the arm's

length price

[Section

92C(1)]

As per books of

account

As computed by the

assessee having regard

to the arm's length

price

1 P Ltd. Purchase of RM CUP/ TNMM

2 P Ltd. Interest on loan CUP/ Any

Other Method

3 P Ltd. Reimbursement of

expenses paid

Any Other

Method

100 100

200 200

300 300

32


Clause 22: Has the assessee entered into any specified domestic transaction (s) being any expenditure

in respect of which payment has been made or is to be made to any person referred to in section

40A(2)(b)? (Reporting for A Ltd.)

Sr.

no

Name of the person

with whom the

specified domestic

transaction has

been entered into

Description of the

transaction



Method used for

determining the

arm's length

price

[Section 92C(1)]

As per books of

account

As computed by the

assessee having

regard to the arm's

length price

4 Q Ltd. Transportationcharges paid

CUP/Any Other

Method/ TNMM

5 Q Ltd. Rent paid CUP/Any Other

Method

6 R Ltd. Purchase of

packing material

CUP/ TNMM

7 R Ltd. Commission paid CUP / TNMM

400 400

500 500

600 600

700 700

33


Transactions Entered Documents to be maintained

Purchase / Sale of raw

material/goods

– Invoices

– Purchase / Sale order

– Product Details

– Sale details if sold to 3rd

Party

– Pricing strategy

– Proof of price negotiations

– Quotes from competitors

– Terms of payment

Corporate cost sharing – Nature of expenses

– Auditor’s certificate

allocating the expenses

– Cost benefit analysis

– Basis of allocation between the

companies

– Proof of usage (rendering) of

services

34

Clause 22 – Documentation


Remuneration to Directors – Qualification

– Work Experience & Profile

– Minutes of Meeting

authorizing the director’s

remuneration

– Data from HR firms for Directors

in the same line of business

– Basis of determination of such

amount

Rent paid towards use of

premises

– Rent receipts

– Documents suggesting the

rent of the surrounding area

– Rental agreement

– Fair market value of the property

(municipal valuation, only if

higher than actual rent paid)

35



Reimbursement of expenses – Nature of expenses with

detailed break-up

– Reason of expenses incurred

for

– Employee details

– Actual invoices of the expense

Interest on loan (non

financial services company)

– Basis of determination of

interest rate

– Interest Rate Card for the

period of loan

– Loan agreement

– Basis on which the interest rate is

pegged above standard rate

36


A Ltd

Unit C

Unit BDevelopment of SEZ (eligible

unit)

Real estate construction (non eligible unit)

Transfer of RM/Capital goods/Supply of labour/Construction services

Engineering services

provided

Assessee A Ltd will report inter unit engineering services rendered by unit B to Unit C under clause 23A and transfer of RM/capital goods/supply of labor/construction services by unit F to unit R under clause 23B

Clause 23A & B – Inter-unit transfers

37

Clause 23A: Has any undertaking or unit or enterprise or eligible business of the assessee [as referred

to in sec 80A(6), 80IA(8) or 10AA] transferred any goods or services to or acquired any goods or

services from another business carried on by the assessee? (Reporting for DEF Ltd.)

Sr.

no

Name and details of

business from which

goods or services

have been

transferred

Description of

goods or

services

acquired/transfe

rred



Method used

for

determining

the arm's

length price

[Section

92C(1)]

As per books of

account

As computed by the


to the arm's length

price

1 Unit B (Eligible

unit)—Development

of SEZ

Engineering

services

rendered

100 100 CUP/ TNMM

Reporting under Clause-23A


38

Clause 23B: Has any undertaking or unit or enterprise or eligible business of the assessee [as referred

to in sec 80A(6), 80IA(8) or 10AA] transferred any goods or services to or acquired any goods or

services from another business carried on by the assessee? (Reporting for DEF Ltd.)

Sr.

no

Name and details of

business from which

goods or services

have been acquired

Description of

goods or

services

acquired/transfe

rred



Method used

for

determining

the arm's

length price

[Section

92C(1)]

As per books of

account

As computed by the


to the arm's length

price

1 Unit C—Real estate construction (non eligible unit)

Transfer of RM/capital goods/supply of labour/construction services

200 200 CUP/

TNMM/Any

Other Method

Reporting under Clause-23B


39

Issues in SDT

Applicability of SDT

41

Whether indirect

shareholding is

covered under S.

40A(2)(b)?

The concept of indirect holding is not specifically covered under

section 40A(2)(b) of the Act and hence only direct holding is to be

considered for the purpose of applicability of SDT.

However, Indirect shareholding may be covered where shares are

held in representative capacity or as a trustee of another company

and in such cases shareholding structure needs to be evaluated

Does Indirect shareholding amount to “close connection” ?

Whether all related

shareholding needs to

be aggregated under

S. 40A(2)(b)

Only an individual holding of 20% or more of the total shareholding

is covered under S..40A(2)(b) of the Act and there is no requirement

under the law for aggregation of group holdings.

What is the meaning of

“close connection”

referred to in Section

80IA of the Act?

No definition under the Act for the term “close connection”.

Primary onus is on the taxpayer to disclose such transactions in

Form No. 3CEB and also to maintain documentation

Advisable to interpret the term in a wider manner & also consider

provisions of section 92A of the Act.

Companies participating, directly or indirectly or through one or

more intermediaries, in the management or control or capital of the

assessee may be considered as closely connected.


42

Whether SDT is

applicable to SEZ

Units?

5th Limb of S. 92BA covers other sections under Chapter VI-A or S.

10AA to which provisions of S. 80IA(8) or S. 80IA(10) apply.

SDT provisions will be applicable to SEZ units for transactions

referred to under section 10AA of the Act read with sections 80IA(8)

or 80IA(10) of the Act.

Is SDT applicable to

the assessee paying

tax under Section

115JB on Minimum

Alternative Tax (MAT)

profits?

Applicability of SDT does not depend upon whether or not assessee

pays tax under section 115JB of the Act - Minimum Alternative Tax

(MAT) on book profits

Applicability of SDT to

presumptive tax

provisions such as S.

44AE, 44F, 44BB,

44BBA, 115VA, etc.

These sections, being specific sections, override provisions

contained in Section 28 to 43B of the Act and hence SDT may not be

applicable to same.

However, on a conservative basis, SDT (Chapter X) also being

special provision, all eligible transactions should be disclosed in

form 3CEB along with appropriate note about presumptive taxation

in order to mitigate potential penal consequences.


43

Whether “capital

expenditure” is covered

under SDT?

Expenditure on Fixed assets being entitled to depreciation would

be covered within the provisions of SDT and needs to be

disclosed in Form 3CEB and benchmarked in the year of

purchase. There is no need to disclose depreciation on year by

year basis.

Purchase of land also can have an impact when sold and hence

would be covered by SDT provisions and should be disclosed in

Form 3CEB and benchmarked in the year of purchase.

Whether SDT is

applicable to purchase

of capital asset from AE

claimed as deduction

under section 35AD?

This payment is likely to be considered as an allowance in the

nature of expenditure referred to in S. 92(2A). This view is also

supported by ICAI guidance Note.

Considering stringent penal consequences, it would be advisable

to disclose and benchmark the transaction.

Whether loans /

advances / inter

corporate deposits etc.

given to related parties

are covered within SDT?

The transaction relating to loans / advances / inter corporate

deposits etc. to related parties are not expenditure. Hence , SDT

provisions do not apply.

Interest arising from these loans etc. will be outside the purview

of SDT provisions since currently income is not sought to be

covered under the provisions of Section 92BA(i) of the Act.


44

Assets acquired under

slump sale, where values

for individual assets

cannot be identified?

The aggregate value of all the assets acquired under slump sale is

required to be disclosed in the Form 3CEB as the fixed assets

qualify for depreciation.

Whether prepayment of

expenses / Advances

paid to related parties

covered under section

40A(2)(b) of the Act are

covered under the ambit

of section 92BA(i)?

In respect of prepayment / advance of expenses, only the

expenditure accrued during the year is to be reported in Form

3CEB and accordingly benchmarked


45

Whether trade discount

and cash discount are

covered under SDT

provisions?

SDT provisions may not apply to discounts not accounted

separately in the books.

However, it is advisable to report cash discounts recorded

separately in the books.

Whether payment of

‘dividend’ on shares’ or

‘guarantee fee’ to

domestic related parties

need to be disclosed in

Form No. 3CEB as SDT?

Payment of dividend is not be covered by the SDT provisions since

it is an appropriation of profits and not a charge on profits.

Payment of guarantee fee is a revenue expenditure and is required

to be reported and benchmarked.

Whether portion of the

expenses disallowed

under section 14A of the

Act as being attributable

to earning of exempt

income covered under

SDT?

All the transactions related to payment of expenditure need to be

disclosed irrespective of whether the said transaction is disallowed

under section 14A or under any other section of the Act.


46

Whether allocation of common

overheads & costs like interest,

administrative cost, HR &

accounting departments cost,

remuneration of director in-

charge of operations for various

units etc. to unit eligible for

deduction under section 80IA or

any other relevant section of the

Act is covered under the purview

of SDT provisions?

Allocation of common overheads & costs to unit eligible for

deduction under section 80IA or any other relevant section

of the Act is covered under the purview of SDT provisions

and accordingly needs to be disclosed in Form 3CEB and

appropriately benchmarked to show the arm’s length nature

of the same.

When no allowance/deduction is

claimed in respect of any

expenditure, whether ALP is

required to be determined under

SDT? (E.g. deduction not

claimed on account of non-

withholding of tax, exempt

entities etc.)?

Even if no deduction or allowance is claimed during the

relevant Assessment year, the reporting of transactions and

determination of ALP would be essential under the Transfer

pricing provisions as incurrence of expenditure comes first

and then the allowability.


47

Section 92BA(i) of the Act states

“…any expenditure in respect of

which payment has been made or

is to be made to a person referred

to in clause (b) of sub-section (2)

of section 40A”.

If the assessee later writes back

the amount in its books, does that

take the transaction out of the

purview of SDT?

Even in case where the amount payable by the assessee

is subsequently written back by the assessee in its books

of account, compliance has to be carried out for such SDT

in accordance with the applicable Transfer pricing

provisions owing to the fact that such amount is claimed

as deduction in the Profit & Loss A/c as an expenditure.

However, consequent write back of such amount by the

assessee will not be covered under SDT.

Whether reimbursement of

expenses is covered under SDT?

Transfer pricing provisions relating to SDT are also

applicable to the transaction relating to reimbursement of

expenses.

Whether exclusion of

‘International Transaction’ from

scope of SDT implies that all

transactions with non-residents

are outside the scope of SDT?

International transactions defined in S. 92B read with

Section 92A (Meaning of AE) are outside the scope of

SDT.

However, transactions with non-residents which are not

‘international transactions’ as defined under section 92B

of the Act will be covered by SDT provisions.

Benchmarking & Deductibility Aspects

of SDT

48

What is the impact of addition

due to SDT provisions on profit

linked tax holiday claimed under

Chapter VI-A or u/s. 10AA of the

Act?

If any income is added to the eligible unit during the

course of the assessment proceedings, then no

consequential deduction/ exemption under the relevant

sections can be claimed by the assessee.

If the profit of an eligible unit

referred to in Section 80-IA(10)

of the Act falls within the range

of 3% (1% in case of

wholesalers), what will be

considered as more than

ordinary profits?

If ALP of the SDT entered into by the assessee eligible to

claim the tax holiday falls within +/-3% range (1% in case of

wholesale traders) of the transfer price, then such

transaction shall be deemed to be at ALP and the profits of

such assessee should not be considered to be excessive /

more than ordinary for the purpose of deduction under

Section 80IA(10) of the Act.

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Can application of SDT

provisions lead to notional

taxation of any income of

the taxpayer (for instance,

provision of corporate

guarantee to bank by

Indian parent company for

credit facilities availed by

its domestic subsidiary

without charging any

consideration, interest free

loans)?

As regards the transactions in the nature of provision of

corporate guarantee to bank by Indian parent company for credit

facilities availed by its Domestic AE without charging any

consideration, interest free loans availed, etc. would not attract

SDT provisions since there is no expenditure.

If the aggregate value of all other specified domestic

transactions exceeds Rs. 5 crore, then it would be advisable to

report the transactions such as interest free loan availed, etc. in

Form 3CEB.

If deduction on account of

payment by an assessee to

a Domestic Associated

Enterprise is reduced by

application of SDT

provisions, whether the

Domestic Associated

Enterprise’s income will

automatically stand

reduced to that extent?

No corresponding adjustment to the income of the AE is

permissible.


of SDT

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Treatment of payment of

Director’s Remuneration for SDT

purposes.

Based on the facts of the case & availability of the

information, one needs to benchmark the transaction

relating to payment of managerial remuneration using any

of the prescribed methods including comparison with

prescribed guidelines of the Companies Act or by

aggregating the transaction with other transaction and

benchmarked using TNMM or any other relevant method.


of SDT

Documentation & Other Aspects

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Whether taxpayer can avail DRP

route if adjustments are made in

respect of SDT?

Being an eligible assessee as defined under section

144C (15b) of the Act, the taxpayer can avail DRP

route if adjustments are made in respect of SDT by

the TPO.

Whether two separate set of

documentation and audit reports

need to be maintained/obtained viz.

one for International transaction TP

and another for SDT? Whether a

taxpayer can appoint separate

auditors for international TP and

SDT?

Two separate auditors can be appointed by the

assessee for international TP & SDT and even two

separate reports & Form 3CEB can be prepared in

hard format.

However, only one combined 3CEB can be uploaded

on the tax department website by any one of the

auditors of the assessee.

Whether in case of a company, we

need to consider expenses as per

books of account maintained under

Companies Act or expenses

allowable as per Income Tax Act,

1961?

In case of the assessee being a company, the

expenses to be considered for the purpose of

reporting in Form 3CEB should be as per the books of

accounts maintained under the Companies Act.

Thank You

Natwar ThakrarN. G. Thakrar & Co

Chartered Accountants

4, Big Three Building, 1st Floor,

88, Anandilal Poddar Marg,

Mumbai- 400 002

Tel: 2201 8184/ 2207 9094

Mobile: 98210-21841

Email: [email protected]

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