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01 February, 2017

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Amendment in Domestic Transfer pricing - Budget 2017

Amendment in Domestic Transfer Pricing - Budget 2017
Broadly in budget 2017 there is two changes in Domestic Transfer Pricing
  1. Omission of section 92BA(i)
  2. Insertion of Section 92 CE
These changes are describe as follows:
  1. As per Finance bill, 2017 section 92 BA (i) of income tax shall be omitted.
Section 92BA has a list of specified domestic transactions and clause (i) of this section is as follows:
“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) of section 40A”.
By omitting this section government has removed all the parties mentioned under section 40A(2)(b) from the ambit of Specified Domestic Transaction.
Section 40(2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the 2[Assessing] Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him there from, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.
Section 40 A(2)(b)
The persons referred to in clause (a) are the following, namely :—
(i) Where the assessee is an individual
any relative of the assessee;
(ii)Where the assessee is a company, firm, association of persons or Hindu undivided family
Any director of the company, partner of the firm, or member of the association or family, or any relative of  such director, partner or member;
(iii) Any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual;
(iv) A company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member, 29[or any other company carrying on business or profession in which the first mentioned company has substantial interest];
(v) Company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member
(vi)Any person who carries on a business or profession,—
(A) Where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or
(B) Where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person.
Explanation — for the purposes of this sub-section, a person shall be deemed to have a substantial interest in a business or profession, if,—
(a) In a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than twenty per cent of the voting power; and
(b) In any other case, such person is, at any time during the previous year, beneficially entitled to not less than 20%of the profits of such business or profession.
  1. After section 92CD of the Income-tax Act, the following section shall be inserted with effect from the 1st day of April, 2018, namely:—
Section 92CE
  1. Where a primary adjustment to transfer price,—
  1. has been made suo motu by the assessee in his return of income;
  2. made by the Assessing Officer has been accepted by the assessee;
  3. is determined by an advance pricing agreement entered into by the assessee under section 92CC;
  4. is made as per the safe harbour rules framed under section 92CB; or
  5. is arising as a result of resolution of an assessment by way of the mutual agreement procedure under an agreement entered into under section 90 or section 90A for avoidance of double taxation,
The assessee shall make a secondary adjustment:
Provided that nothing contained in this section shall apply, if,–
  1. The amount of primary adjustment made in any previous year does not exceed Rs. 1 Crore; and
  2. The primary adjustment is made in respect of an assessment year commencing on or before the 1st April, 2016.
  1. Where, as a result of primary adjustment to the transfer price, there is an increase in the total income or reduction in the loss, as the case may be, of the assessee, the excess money which is available with its associated enterprise, if not repatriated to India within the time as may be prescribed, shall be deemed to be an advance made by the assessee to such associated enterprise and the interest on such advance, shall be computed in such manner as may be prescribed.
  2. For the purposes of this section,—
(i) “Associated enterprise” shall have the meaning assigned to it in sub-section (1) and sub-section (2) of section 92A;
(ii) “Arm’s length price” shall have the meaning assigned to it in clause (ii) of section 92F;
(iii) “Excess money” means the difference between the arm’s length price determined in primary adjustment and the price at which the international transaction has actually been undertaken;
(iv) “Primary adjustment” to a transfer price means the determination of transfer price in accordance with the arm’s length principle resulting in an increase in the total income or reduction in the loss, as the case may be, of the assessee;

(v) “Secondary adjustment” means an adjustment in the books of account of the assessee and its associated enterprise to reflect that the actual allocation of profits between the assessee and its associated enterprise are consistent with the transfer price determined as a result of primary adjustment, thereby removing the imbalance between cash account and actual profit of the assessee.



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