Specified Domestic Transactions and Transfer Pricing Provisions in India

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By Gunjan Sinha, Country Manager of Dezan Shira & Associates India

DELHI – India’s Revenue Authorities have extended the applicability of Transfer Pricing provisions to specified local transactions executed between related parties. These provisions initially became effective on March 31, 2013 for transactions exceeding an aggregate value of INR 50 million (US$805,000).

India’s income tax law requires transactions between “related parties” to be tested against their market value.  Consequently, Indian tax authorities have introduced additional provisions for specified domestic transactions that are similar to provisions applied to international transactions.

The provisions of the Income Tax Act have been altered to include new sub-clauses that cover these specified domestic transactions under the Transfer Pricing Regime. These amended laws introduce a new focus on allowances and income related to Specified Domestic Transactions (SDT), which will now be computed using the Arm’s Length Price (ALP) principle.

Transactions that are now covered under the SDT changes are as follows:

  • Any expenditure in which payment has been made or will be made to a person referred to in clause (b) of sub-section (2) of section 40A of the Income Tax Act.

For the purpose of the above provisions, the definition of person in reference to the company includes the following:

    • A director
    • The Relative of a director
    • An instance where an entity (including a company or director) has a substantial voting interest of more than 20 percent, either individually or through relatives
  • Any transaction that results in the claiming of deductions as provided in the Income Tax Act.
  • Any transaction that relates to the transfer of goods or services as mentioned in provisions of section 80-IA (8) & (10) of the Income Tax Act (i.e. Deductions related to profits and gains from industrial undertakings or enterprises engaged in infrastructure development, telecommunication Service Providers or producers and distributors of power). This applies to transactions between an entity located in tax holiday area, and one located in a non-tax holiday area if both are linked by the same management structure.
  • For undertakings established in a special economic zone, free trade zone (SEZ) or export oriented unit involving the transfer of goods and services to another undertaking with the same owner at a non-market price value, profits are computed at market price. Eligible deductions from these recomputed profits under SEZs and other similar units can be taken advantage of, however.
  • Other transactions may be covered by the SDT provisions in the future, but Indian authorities have not notified the business community of any other such transactions at the current time.

The new domestic transfer pricing regulations for SDTs have also brought about several additional requirements for businesses, including a mandatory evaluation to determine if specified transactions are in line with the ALP. Companies also need to maintain proper documentation outlining their ALP transaction methods and calculations.

Additionally, Companies will need to obtain a certificate from a chartered accountant in Form 3CEB for transactions with related parties that meet the specifications outlined above, and exceed the aggregate threshold limit of INR 50 million(US$805,000). A copy of this form must also be submitted to tax authorities by November 30.

Penalties for non-compliance with these new requirements include a 2 percent charge on the transaction value for the non-maintenance of these documents, non-disclosure of information in an auditors certificate or for incorrectly completing the required forms. An additional penalty of INR100,000 (US$1,600) may be charged is the accountant’s report is not furnished by November 30. A penalty of between 100 and 300 percent of the tax amount may also be charged if adjustments must be made by the tax authority for incorrect pricing of transactions.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam in addition to alliances in Indonesia, Malaysia, Philippines and Thailand as well as liaison offices in Italy and the United States.

For further details about investment restrictions or to contact the firm, please email india@dezshira.com, visit www.dezshira.com, or download the company brochure.

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