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With the government’s demand of 57 per cent more tax under transfer pricing rules in 2012-13 making companies jittery, the Income Tax (I-T) Department has adopted a course-correction mode, giving ‘guidance’ to assessing officers to help them frame orders based on international best practices.
Officers have been asked to provide detailed reasoning to an assessee, while passing a tax order.
Of about 3,200 cases considered for transfer pricing auditing in 2012-13, there was an adjustment (demand for taxes) of Rs 70,000 crore for 1,600 cases, according to preliminary estimates by the I-T department. In 2011-12, there was an adjustment of Rs 44,531 crore for 1,343 cases.
To reduce profits and tax liability in India, companies often under-value the sale of goods and services to their foreign subsidiaries. An adjustment is made when the I-T department’s assessment of the transaction is higher than the price determined by the taxpayer. Last month, the finance ministry had reduced the ‘tolerance’ band for accepting an arm’s length price paid by an assessee from five per cent to three per cent for 2012-13.
After many companies that received adjustment orders challenged these before adjudicating authorities, the Central Board of Direct Taxes (CBDT) started issuing guidance notes to assessing officers to standardise the procedure for transfer pricing adjustments across the country. CBDT is also laying down broad principles for audits, in line with international practices and court rulings. Currently, in some cases, even the views of various jurisdictions within the country aren’t the same.
“We are going in a scientific way, making the search process more logical. Guidance notes are being issued so that everyone follows a similar approach. We will keep updating the guidance based on feedback from the market,” said a finance ministry official.
Officials played down the sharp jump in transfer pricing adjustments last year. They said it was in sync with economic indicators. The primary contributor to this, they said, was the order of Rs 15,000 crore on Shell for under-pricing its share-sale to a group company. Vodafone’s tax liability, too, was pegged higher by Rs 5,000 crore. Of the additional adjustment of Rs 25,500 crore last year, Rs 20,000 crore was accounted for by Shell and Vodafone alone. “Though adjustments were been made in about 50 per cent of the total audits completed, as in the previous years, the quality of adjustments has improved,” said the official.
Last year, transfer pricing orders were also issued to companies such as Microsoft, Bharti Airtel, Essar, HSBC Securities, Standard Chartered Securities, Havells India, Patel Engineering, Ikea, Hindalco, Gillette, GE, Hindustan Unilever and LG.
The I-T department expects with the introduction of advance pricing agreements (APAs), transfer pricing adjustments would fall. Under APAs, the government and the taxpayer would determine the pricing of a transaction in advance, doing away with the uncertainty for companies. Since the APA regime was introduced last year, 146 applications have been filed for APAs.
However, finalising the agreements could take six months to a year.
Countries such as Australia, the UK, Japan and Canada already issue guidance notes for transfer pricing adjustments. Officials said it took India some time to work on a similar pattern, as it had started transfer pricing audits only in 2003-04.
| No. of transfer prices adjustment cases | Amount of amount adjusted (demand of taxes) in Rs crore | |
| 2004-05 | 239 | 1,220 |
| 2005-06 | 337 | 2,287 |
| 2007-08 | 471 | 3,432 |
| 2008-09 | 84 | 1,614 |
| 2009-10 | 670 | 6,140 |
| 2010-11 | 1,138 | 23,237 |
| 2011-12 | 1,343 | 44,531 |
| 2012-13 | 3,200 | 70,000 |
Source: Finance Ministry
