Transfer pricing extended to some domestic dealings

The Union Budget 2012-13 saw major proposals to plug the adverse practices used by taxpayers to reduce their tax burden. Among the various general and specific anti-abuse proposals, a conspicuous proposition included extending the realm of transfer pricing to “specified domestic transactions”. This is a consequence of the Supreme Court’s direction in the case of Commissioner of Income Tax v GlaxoSmithKline Asia(P) Ltd.

Thus, it is proposed that from 2012-13, taxpayers with specified domestic transactions exceeding ₹50 million (US$1 million) will have to ensure that their intra-group transactions are carried out at arm’s length. While such anti-abusive measures already exist in the current law, the proposal has mammoth importance owing to a paradigm shift in the basis of measuring rationale of domestic related-party transactions, from generic fair market value to a more specific and methodical arm’s length price.

According to the proposal, transfer pricing regulations would apply to: expenditure paid or payable to a specified related party under the Income Tax Act, 1961, section 40A(2)(b); taxpayers claiming undertaking-specific deduction (section 80-IA, IB, IC, etc.); and units operating in special economic zones and claiming deduction under section 10AA.

Economic Laws Practice is a full-service law firm with headquarters in Mumbai and offices in New Delhi, Pune and Ahmedabad. Ajit Tolani is an associate partner and Rahul Charkha is an associate at the firm.