Meaning of specified domestic transaction.

164

In this Chapter, “specified domestic transaction” in case of an assessee means any of the following transactions, not being an international transaction—

• (a) any transaction referred to in section 122;
• (b) any transfer of goods or services referred to in section 140(9);
• (c) any business transacted between the assessee and other person as referred to in section 140(13);
• (d) any transaction, referred to in any other section under Chapter VIII or section 144, to which provisions of section 140(9) or (13) are applicable;
• (e) any business transacted between the persons referred to in section 205(4);
• (f) any other transaction as prescribed, and where the aggregate of such transactions entered into by the assessee in a tax year exceeds a sum of twenty crore rupees.

Explanation

Section Summary:

Section 164 defines the term "specified domestic transaction" under the Income Tax Act. These are specific types of transactions between related parties or entities within India that are subject to transfer pricing regulations, even though they are not international transactions. The purpose of this section is to ensure that such domestic transactions are conducted at arm's length, preventing tax avoidance through manipulation of prices or terms between related parties.

Key Changes:

1. Expanded Scope: Unlike the previous law, which primarily focused on international transactions, this section brings certain domestic transactions under the purview of transfer pricing regulations.
2. Threshold Limit: The section applies only if the aggregate value of such transactions exceeds ₹20 crore in a financial year.
3. Inclusion of New Transactions: The section explicitly lists various types of domestic transactions (e.g., transactions under Sections 122, 140(9), 140(13), etc.) that qualify as "specified domestic transactions."

Practical Implications:

1. For Taxpayers: Businesses engaged in transactions with related parties (e.g., subsidiaries, sister concerns, or entities under common control) must ensure that these transactions are conducted at arm's length. This means the terms and prices should be similar to what would be agreed upon between unrelated parties.
2. For Compliance: Taxpayers must maintain detailed documentation to substantiate that the transactions comply with arm's length principles. Failure to do so may lead to adjustments by tax authorities and potential penalties.
3. For Tax Authorities: This section empowers tax authorities to scrutinize domestic transactions to prevent tax evasion through profit shifting or price manipulation.

Critical Concepts:

1. Specified Domestic Transaction: A transaction between related parties within India that falls under the categories listed in Section 164 and exceeds the ₹20 crore threshold.
2. Arm's Length Principle: The principle that transactions between related parties should be conducted as if they were between unrelated parties, ensuring fair market value.
3. Aggregate Value: The total value of all specified domestic transactions in a financial year. Only if this exceeds ₹20 crore will the section apply.

Compliance Steps:

1. Identify Transactions: Determine if any transactions fall under the categories listed in Section 164 (e.g., transfers of goods/services, business transactions between related parties).
2. Calculate Aggregate Value: Sum up the value of all such transactions in the financial year to check if they exceed ₹20 crore.
3. Maintain Documentation: Keep records of contracts, invoices, and other documents to prove that the transactions comply with the arm's length principle.
4. File Required Forms: Include details of specified domestic transactions in the tax return, along with necessary disclosures.

Examples:

1. Scenario 1: Company A sells goods to its subsidiary, Company B, for ₹15 crore. Company A also provides services to another related entity, Company C, for ₹10 crore. The aggregate value of these transactions is ₹25 crore, which exceeds the ₹20 crore threshold. Both transactions are now subject to transfer pricing regulations under Section 164.
2. Scenario 2: A parent company leases office space to its subsidiary for ₹5 crore and provides IT services for ₹12 crore. The total value is ₹17 crore, which is below the threshold. These transactions are not considered "specified domestic transactions" under Section 164.

This section ensures that domestic transactions between related parties are transparent and comply with fair market practices, reducing the risk of tax evasion.