Domestic Transfer Pricing Compliances
Transactions between related parties have always been suspected as a tool to shift profits and thereby reduce the overall tax liability of a company or a group operating from multiple locations having different tax laws.
Transactions between related parties have always been suspected as a tool to shift profits and thereby reduce the overall tax liability of a company or a group operating from multiple locations having different tax laws. Even before the concept of Specified Domestic Transaction was introduced in the Indian tax laws, several other provisions existed to curb the tax avoidance by inter-company transactions between domestic companies of the same group.
In order to mitigate tax arbitrages in transactions entered into between domestic companies, the concept of Specified Domestic Transactions was introduced in the Income-tax Act, 1961 by Finance Act, 2012.
Concept of Tax Neutrality and Tax Arbitrage
Transactions between two entities located in same tax jurisdiction does not have any impact on the revenue base of tax authorities. The same can be understood by way of below example.
In the above example, Company A and Company B are both located in the same tax jurisdiction. In case Company A charges more than fair market value for the goods or services provided by it to Company B, then although the income of Company B decreases, the same is compensated by an equal increase in the income of Company A. Vice versa is the case when Company A undercharges for the goods and services in which case the income of Company B is increased by an equal amount. From the standpoint of tax authorities, it is getting the same amount of tax irrespective of the fact as to who is paying the tax. This phenomena is called Revenue Neutrality where from the standpoint of tax authorities, inter-group transactions do not have any impact.
Meaning of Specified Domestic Transactions
The definition of Specified Domestic Transactions was inserted in the Income-tax Act, 1961 by the Finance Act, 2012 wherein certain transactions between domestic companies were considered as specified domestic transactions being subject to domestic transfer pricing regulations. Following are the specified conditions that are required to classify transactions as specified domestic transaction:
- The transaction should not be an international transaction;
- The transaction should be covered under any of the limb (ii) to (vi) of section 92BA;
- The aggregate of such transactions entered into by the taxpayer should exceed the threshold limit of INR 20 cores (from assessment year 2016-17).
As per the provisions of the Act, once a transaction falls under Specified Domestic Transaction, all the compliance requirements relating to transfer pricing documentation, accountant’s report, etc. shall apply to it in the same manner as they apply for international transactions.