The transfer pricing provisions under Income Tax Act cover within its fold even domestic transactions from the assessment year 2013-14 onwards. So if the assessees have Specified Domestic Transactions for aggregate of Rs 20 Crore ( previoulsy only 5 crore ) as defined under section 92BA of the Income Tax Act with specified persons , they ( assessees ) will have to comply with transfer pricing laws that requires not only maintenance of records but seeking of accountants report under section 92E of the I.T.Act. This post is devoted on the topic that in certain situation , the domestic transfer pricing provision may not be applicable to certain assessee even if the gross transaction exceeds specified limits.
Who are affected by Transfer Pricing Law in Case of Domestic Transactions ?
Section 92 clearly provides that if two associates involves in Specified Domestic Transactions, income or expenditure on account of Specific Domestic Transactions shall be determined on the basis of arms length pricing. Read the exxcerpt below :
92. (1) Any income arising from an international transaction shall be computed having regard to the arm’s length price.
Explanation.—For the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm’s length price.
(2) Where in an international transaction or specified domestic transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm’s length price of such benefit, service or facility, as the case may be.
(2A) Any allowance for an expenditure or interest or allocation of any cost or expense or any income in relation to the specified domestic transaction shall be computed having regard to the arm’s length price.
Then , we need to understand the meaning of specified domestic transaction . If the domestic transaction between associated enterprise does not fall within the definition as provided under section 92BA , transfer pricing provision shall not cover such case.
Let us see what is the meaning as per section
92BA. For the purposes of this section and sections 92, 92C, 92D and 92E, “specified domestic transaction” in case of an assessee means any of the following transactions, not being an international transaction, namely:—
|(i)||any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) ofsection 40A;|
|(ii)||any transaction referred to in section 80A;|
|(iii)||any transfer of goods or services referred to in sub-section (8) of section 80-IA;|
|(iv)||any business transacted between the assessee and other person as referred to in sub-section (10) of section 80-IA;|
|(v)||any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable; or|
|(vi)||any other transaction as may be prescribed,|
and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of twenty crore rupees.
Kind attention is drawn to Clause (i) of section 92BA which consider any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) ofsection 40A;
So, if the expenditure itself does not fall under section 40A(2)(b) , then such expenditure should also be out of the definition of Specified Domestic Transaction definition u/s 92BA of the I.T.Act . Correct ?
Here Comes Court Judgment !
Karnataka High Court in case of CIT, Central vs Rama Boards Ltd  35 taxmann.com 4 (Karnataka) held that the subsidiary of assessee-company is not a related person within meaning of sub-clause (ii) of clause (b) of section 40A(2) and, thus, payment made by assessee to its subsidiary cannot be disallowed by invoking provisions of said section. For this , the Hon’ble High Court relied on the judgment of Mumbai High Court in CIT v. V.S. Dempo & Co (P.) Ltd.  196 Taxman 193.
The facts of the case was that the assessee entered into an agreement with M/s. Flexsole Raman Limited, a subsidiary company for manufacture of footwear soles. Under that agreement,assessee paid Rs 48 Lakh for manufacturing related jobs. The Assessing Officer disallowed Rs.24,00,000/- under Section 40A(2)(b) of the Income Tax Act.
Aggrieved by the said order, the assessee preferred an appeal. The appellate authority confirmed the said order. Aggrieved by these two orders, the assessee preferred an appeal before the Tribunal.
ITAT deleted the disallowance by holding among other thing is that the case of assessee , being holding and subsidary company , does not fall under the provision u/s 40A(2)(B) of the Income Tax Act.
When department appealed against the order of ITAT, Hon’ble Karnataka High Court upheld the order of ITAT and confirmed the ruling about the non-application of provision u/s 40A(2)(b) on the holding company and subsidiary company transactions. For this , the HC quoted the Bombay High Court on the same issue . Read the relavant portion :
10. The Bombay High Court in the case of CIT v. V.S. Dempo & Co (P.) Ltd.  196 Taxman 193/ 8 taxmann.com 159 held that when the assessee is a company and the seller is its subsidiary company, the seller i.e., the subsidiary company does not fall in any of the capacities mentioned under sub-clause (ii) of clause (b) Only a director of the company or any relative of such Director falls under sub-clause (ii) of clause (b) of sub-section (2). Another company, even if it is a subsidiary of the assessee is not a related person within the meaning of sub-clause (ii) of clause (b) of Section 40A(2). While the holding company is a member of its subsidiary company, the subsidiary company is not a member of the holding company. As, the subsidiary company was not a member of the assessee sub-clause (iv) of clause (b) of Section 40A(2) of the Act is also not attracted.
So, it is clear from the order of Mumbai High Court and Karnataka High court that teh transactions between Holding company and Subidary does noes not fall under the provision u/s 40A(2)(b) . If that be so , such transaction is also out of definition of Specified Domestic Transaction.
In other words, in my considered opinion , if holding company and subsidary company have domestic trnsactions even if more than 20 Crore ( previously 5 Crore ) , such transaction will not fall under the Transfer Pricing provision.
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