Specified domestic transactions and provisions of transfer pricing applicable to such transactions

Specified domestic transactions and provisions of transfer pricing applicable to such transactions

Section 92BA:

Meaning of specified domestic transaction - any of following transactions, not being international transactions:

1. Any expenditure in respect of which payment has been made or is to be made to a person referred to in section 40A(2)(b) – omitted by w.r.e.f AY2017-18
2. Any transaction referred to in section 80A(6)
3. Any transaction of goods or services referred to in section 80I-A(8)
4. Any business transected between the assessee and other person as refered to in section 80I-A(10)
5. Any transaction referred to in any other section under chapter VI-A or section 10AA, to which provisions of section 80I-A(8) or 80I-A(10) are applicable; or
6. Any other transaction as may be prescribed

Although above definition excludes international transactions, but following transactions with non-residents may be covered under specified domestic transactions:

1. Remuneration paid by Indian company to a non-resident director
2. Payment by a foreign company having permanent establishment (PE) to non-resident director
3. Payment made by Indian company to foreign company where the foreign company holds at least 20% but less than 26% shares in Indian economy

Applicability of Section 92BA:

Section 92BA shall apply where the aggregate of all the transactions mentioned above entered in to by the assessee in the previous year exceeds a sum of Rs. 20 crores.

Note: - sum of Rs. 20 crores for above should be aggregate of all 6 transaction referred above and should be book value. This value can be taken as net of taxes like VAT, Excise, Service tax etc. if assessee is claiming input of these taxes otherwise gross value should be taken.

Detailed analysis of all 6 transactions

1. Any expenditure in respect of which payment has been made or is to be made to a person referred to in section 40A(2)(b) – omitted by w.r.e.f AY2017-18:

According to section 40A(2)(a), where the assesse incurs any expenditure in respect to which payment has been made to a relative or close associates of the assessee referred to in section 40A(2)(b) and the AO is of the opinion that such expenditure is excessive and unreasonable having regard to –

1. Fair market value
2. Legitimate needs of business
3. Benefit derived

However no disallowance for above if such transaction is at arm’s length price as defined in section 92F(ii)

2. Inter unit / undertaking/business transfer (section 80A(6):

Where any goods or services held for the purpose of undertaking / unit/business are transferred to any other business of assessee or vice versa, and the consideration for such transfer does not corresponds to the market value, the profit or gain of such unit/ undertaking / enterprise/ business shall be computed as if the transfer, in either case, had been made at market value (arm’s length price as defined in section 92F(ii)) as on that date.

3. Inter business transfers to be at market value (section 80 IA (8))

Where any goods or services held for the purpose of business are transferred to any other business of assessee or vice versa, and the consideration for such transfer does not corresponds to the market value, the profit or gain of such unit/ undertaking / enterprise/ business shall be computed as if the transfer, in either case, had been made at market value (arm’s length price as defined in section 92F(ii)) as on that date.

4. Transfer to / from a person who has close connection with the assessee (section 80IA (10):

Where it appears to the AO that owing to the close connection between the the assessee carrying on the eligible business and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces more than ordinary profits, the AO shall compute the profit of eligible business, take the amount of profits as may be reasonable deemed to have been derived therefrom (arm’s length price as defined in section 92F(ii)).