Along with international transactions, even specified domestic transactions in India now come under the purview of transfer pricing provisions. Check out this post to know more about these provisions.
In accounting, transactions that take place between enterprises with common ownership should comply with the transfer pricing regulations. As per the IT Act, the computation of such transactions should be done with the help of the ALP (Arm’s Length Price) principle. As per this principle, the payable amount would be calculated by assuming that the entities with common ownership are uncontrolled or unrelated.
While the provisions mostly apply to cross-border transactions, even some domestic transactions come under the purview of these provisions in India.
Some of the most important aspects of domestic provisions are discussed below-
What Types of Transactions are Covered Under the Domestic Transfer Pricing Provisions?
The transfer pricing provisions for domestic transactions were inserted in the IT Act through the Finance Act of 2012, and a separate Section 92BA was added for the same. The regulations apply to transactions that are not international in nature, and the aggregate of such transactions is above the threshold limit of Rs. 20 crores.
There are additional requirements for transactions that are covered under these provisions. They are-
- Transactions mentioned under Section 80A of the IT Act
- Transactions including goods and services as specified under Section 80-IA(8)
- Business transaction between a person and an assessee as specified under Section 80-IA(10)
- Transactions covered under Section 80-IA(8) and 80-IA(10) and also specified under Section 10AA or Chapter VI-A
How is the ALP Computed?
There are multiple methods for a business entity to compute the Arm’s Length Price of such specified domestic transactions. Section 92C of the IT Act mentions these pricing models-
- Comparable Uncontrolled Price or the CUP Method
- Cost Plus Method of CPM
- Resale Price Method or RPM
- Transactional Met Margin Method or TNMM
- Profit Split Method or PSM
As discussed under Section 10C, the selection of the ALP computation method should be based on how well a particular method suits the circumstances and facts of specified transactions.
What are the Compliance Requirements and Penalty for Non-Compliance?
Business entities conducting such transactions that are covered under domestic transfer pricing provisions should get their accounts audited by an accountant. There is a separate Form 3CEB that should be filled and signed by the accountant after a successful account audit. The audit report can then be filed online on or before the tax filing due date.
Under Section 271AA, there is a penalty of 2% of the total transaction value if a business fails to maintain a detailed record of such transactions. There is also a penalty of Rs. 1 lakh under Section 271BA if a business is unable to submit the audit report within the due date.
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Complying with the Domestic Transfer Pricing Provisions
The domestic transfer pricing laws apply to not just larger businesses but also a host of mid-sized partnership firms, groups, HUFs, and even individuals. Non-compliance could result in steep penalties and other legal problems.
Working with a professional tax advisory firm is how businesses can ensure that they comply with these provisions and protect themselves from tax litigations.