The Finance Bill proposes to increase the threshold limit for applicability of transfer pricing regulations to specified domestic transactions from Rs. 5 crore to Rs. 20 crore.
“Transactions between 2 domestic taxpayers was brought within the ambit of transfer pricing compliance by Finance Act 2012. Companies with domestic related party transactions less than Rs. 5 Crores were exempt from transfer pricing compliance The proposed enhancement in the threshold for domestic TP to Rs. 20 Crores would significantly reduce the compliance burden for the small and medium enterprises. This is very encouraging and shows that the government is concerned about the pains of taxpayers and would be open to constructive suggestions” says Vijay Iyer, tax partner at EY.
“Increasing the threshold limit for specified domestic transactions (SDT) for application of transfer pricing is welcome. However, making transfer pricing provisions as not applicable when there is no tax arbitrage is sorely missed. No announcement of any guidance to transfer pricing officers to deal with SDT provisions could result in difficulties for the tax payers,” says Hitesh Gajaria, tax partner, KPMG.
The Finance Bill, 2012, introduced domestic transfer pricing provisions based on the views of the Supreme Court (SC) in the case of Glaxo SmithKline Asia. Here, the SC had said that it needs to be considered whether transfer pricing regulations should be applied to domestic transactions in cases where such transactions are not revenue neutral and have an impact on the tax base.
The SC had noted that in the case of domestic transactions, the under-invoicing of sales and over-invoicing of expenses will ordinarily be revenue-neutral in nature as any profit that is shifted from one company or entity to another will be subject to tax in India.
The SC pointed out that there would be two exceptions to revenue neutrality. First, if one of the related entities is loss making and the other is profit making and profit is shifted to the loss making entity.
However, the domestic transfer pricing provisions brought within their ambit transactions which are also revenue neutral and this anomaly continues. Domestic transfer pricing provisions cover expenditure under section 40A(2) of the I-T Act, which includes payments to ‘any’ directors. To illustrate, a hotel chain and Company ABC, which are part of the same corporate group are both profit making and bear the same tax rate. The transfer pricing authorities could claim that Company ABC which rented some rooms did not get a good corporate discount and paid more to the hotel. Thus, it would disallow a portion of the expenditure, on which tax would have to be paid by Company ABC. At the same time, tax has already been paid by the hotel company on its revenue from Company ABC, resulting in double taxation of the same transaction.