The government may be looking at fixing a loophole in the domestic transfer pricing regulations that may be exploited by some companies, people in the know said.

In the budget the government said transfer pricing won’t apply in the case of transactions among group companies. It will only apply in a case where one of the entities involved in related party transaction enjoys a tax break.

The government has made this change in the budget. Industry trackers say that before the announcement, many companies were worried that the tax department could trigger transfer pricing adjustments even in domestic situations. Going ahead there will be no deterrent for a company to indulge in transactions with related parties where prices may be too high or too low to suit the company’s tax stance.

Domestic transactions between two Indian related parties have been exempted from transfer pricing provisions except in the case of companies which claim specified tax holidays. This reduces a significant burden on domestic transfer pricing compliance and also means that domestic transactions need not be entered into at arm’s length, said industry experts.

Arm’s length pricing is basically a price the seller will fetch for goods or services in an open market and the rate charged by other sellers (plus-minus 5 per cent).

The government has taken views from senior tax experts and sought their opinions. It is understood that the government may come out with additional regulations or articulate the current framework to plug the loophole.