Do I still have to benchmark payments to my own directors and group companies under transfer pricing?
No — clause (i) of section 92BA, which covered payments to persons specified in section 40A(2)(b), was omitted by the Finance Act 2017 with effect from 1 April 2017, and tribunals have held the omission wipes it out from inception. What survives in section 92BA are inter-unit and tax-holiday transactions, and they attract transfer pricing only if the aggregate of specified domestic transactions exceeds Rs 20 crore in the year; section 40A(2) itself continues to apply on its own terms.
Domestic transfer pricing was introduced to bring arm's length discipline to purely Indian related-party dealings. As originally enacted, section 92BA listed payments covered by section 40A(2)(b) as the first category of specified domestic transaction, which meant almost every closely held company had to benchmark director remuneration, group service charges and related-party purchases and file Form 3CEB.
The compliance burden was heavy and the revenue yield thin, so the Finance Act 2017 omitted clause (i) with effect from 1 April 2017 — assessment year 2017-18 onward. Payments to specified persons under section 40A(2)(b) are no longer specified domestic transactions.
What remains in section 92BA is the group of transactions that shift profit between a taxed unit and a tax-favoured one: transfers of goods or services between the eligible business and any other business of the same assessee under section 80-IA(8); business transacted between the eligible business and a closely connected person producing more than ordinary profits under section 80-IA(10); transactions to which those provisions are applied through Chapter VI-A or section 10AA; the section 80A transfer rules; and transactions of a company opting into section 115BAB where sub-section (6) is attracted.
The threshold is aggregate, not per transaction. Section 92BA applies only where the aggregate value of the specified domestic transactions entered into in the previous year exceeds Rs 20 crore. Below that, none of the arm's length machinery, documentation or Form 3CEB reporting under section 92E is triggered by this route.
The legal effect of the 2017 change is stronger than a normal amendment. In Texport Overseas the Bangalore Tribunal held that an omission is not a repeal, that section 6 of the General Clauses Act saves pending proceedings only on a repeal, and that a provision omitted without a saving clause is deemed omitted from inception — following the Supreme Court in Kolhapur Canesugar Works and General Finance Co. The consequence was that the officer's reference to the transfer pricing officer under clause (i) was invalid even for years before the omission, and the matter had to be examined under ordinary assessment provisions instead. The Karnataka High Court has supported that view.
That does not leave related-party payments unpoliced. Section 40A(2)(a) still lets the assessing officer disallow so much of an expenditure paid to a specified person as he considers excessive or unreasonable, judged against the fair market value of the goods, services or facilities, the legitimate needs of the business, and the benefit derived. Section 40A(2)(b) defines the specified persons — relatives, directors, partners, members of an HUF or AOP and their relatives, and anyone with a substantial interest, meaning beneficial ownership of at least 20% of the voting power or entitlement to at least 20% of the profits.
The practical difference is who carries the burden and by what standard. Under section 92BA the taxpayer had to document and benchmark. Under section 40A(2) the officer must form an opinion that the payment is excessive or unreasonable, and reasonableness is judged commercially rather than by a prescribed transfer pricing method.
Many audit checklists still ask for Form 3CEB on 40A(2)(b) payments years after the requirement went, generating cost and needless disclosure. Conversely, taxpayers who assume the omission ended all scrutiny of related-party payments miss that section 40A(2) survived untouched and is still the officer's main tool. And where an old reference under clause (i) is still alive, the Texport line may make the whole reference bad in law.
Our captive power plant supplies electricity to our own factory. The officer values that power at the low rate the Electricity Board pays us for surplus, not the tariff the Board charges us. Which is 'market value' under s.80-IA(8)?
The Assessing Officer has disallowed the whole difference between the statutory minimum cane price and the State advised price my sugar co-operative paid its members. Can he?
The Assessing Officer referred my case to the TPO in a one-paragraph letter without dealing with my objection that there was no international transaction at all. Can I attack the reference itself?
The AO says I short-deducted TDS on director remuneration. Can he disallow the payment under 40(a)(ia)?
Clause (i) of s.92BA was omitted in 2017. Is the TPO adjustment for an earlier year still good?
The TPO says we issued shares to our parent too cheaply. Can he tax the shortfall?
The TPO says my advertising spend is higher than comparables and has added the excess as brand building for my foreign parent. Can he do that?
The TPO has adjusted a domestic transaction that the Assessing Officer never referred to him and that I never reported in Form 3CEB. Did he have jurisdiction?
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