SPECIFIED DOMESTIC TRANSACTION

[Mr. M. GOVINDARAJAN]

Chapter X of the Income Tax Act, 1961 (‘Act’ for short) provides for computation of income from international transaction or specified domestic transaction.  The ‘Specified domestic transaction’ has been inserted by Finance Act 2012 with effect from 01.04.2013.  Section 92C of the Act provides for the computation of arm’s length price in relation to international transaction or specified domestic transaction.   Section 92D of the Act provides for maintenance and keeping of information and document by persons entering into international transaction or specified domestic transaction.  Section 92E of the Act provides for obtaining a report from Chartered Accountant to be furnished by persons entering into international transaction or specified domestic transaction.

Section 92BA, which was inserted by Finance Act, 2012 vide Section 36 came into effect from 01.04.2013, provides the meaning of specified domestic transactions.  The said section provides that ‘specified domestic transaction’ in case of an assessee means any of the following transactions, not being an international transaction:

• Any expenditure in respect of which payment has been made or is to be made to a person referred to in Section 40A(2)(b) of the Act;

Section 40A(2)(b) of the Act prescribes the following-

• Where the assessee is an individual, any relative of the assessee;
• 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;
• Any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual;
• A company, firm, association of persons, of HUF 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 or any other company carrying on business or profession in which the first mentioned company has substantial interest;
• A company, firm, association of persons or HUF 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;
• Any person who carries on a business or profession-

• 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
• Where the assessee being a company, firm, association of persons or HUF, 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.

A person shall be deemed to have a substantial interest in a business or profession, if-

• 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 20% of the voting power; and
• 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.

• Any transaction referred to in Section 80A;

Section 80A provides for deductions to be made in computing total income.  Section 80A(1) provides that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter VI-A, the deductions specified in Sections 80C to 80U.  The aggregate amount of the deductions shall not in any case exceed the gross total income of the assessee.

• Any transfer of goods or services referred to in Section 80-IA(8);

Section 80-IA of the Act provides for deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development.  Section 80-IA (8) provides that where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of the deduction the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date.

Where in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner specified presents exceptional difficulties, the Assessing Officer may compute such profits on such reasonable basis as he may deem fit.

The ‘market value’ in relation to any goods or services, means-

• The price that such goods or services would ordinarily fetch in the open market; or
• The arm’s length price.

• Any business transacted between the assessee and other person as referred to in Section 80-IA(10) of the Act;

Section 80-IA(10) of the Act provides that where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason the course of business between them is so arranged that the business transaction between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived there from.

• Any transaction, referred to in any other section under Chapter VI-A or Section 10AA to which provisions of Section 80-IA(8) or (10) are applicable; or

Section 10AA of the Act provides for special provisions in respect of newly established Units in Special Economic Zones.

• Any other transaction as may be prescribed
  • Supply of electricity, transmission of electricity, wheeling of electricity under Section 10THB – Notification No. 11/2015-IT, dt. 04.02.2015;
  • Purchase of milk or milk products – Notification No.90/2015-IT, dated 08.12.2015 

and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of Rs.20 crores (with effect from 01.04.2016; before that period it is ₹ 5 crores).