Transfer pricing: Aligning Indian taxation with global standards

The govt is slowly aligning transfer pricing legislation with global best practices and standards. The move is aimed at lowering tax disputes and making it easier for companies to do business in India

Transfer pricing deals with fixing the price of goods or services transferred between two related entities, either cross-border or domestic, for determining profit and levying of taxes. It is among the top causes of tax-related disputes in India

India has the highest such litigation cases across the globe

The number of cases scrutinised has nearly quadrupled from 1,061 in 2005-06 to 4,290 in 2014-15. So far, Indian courts (including tribunals) have delivered about 1,800 TP rulings. During FY15, the number of rulings pronounced rose 40 per cent compared to FY14

TP involves high costs and low gains for the government, about 70% of the cases across the Supreme Court, high courts and tribunals have been adjudicated in favour of taxpayers

To avoid disputes, the government has devised several rules to determine an arm's length price (ALP), or the price at which such transactions would have been priced had they been unrelated entities

STEPS TAKEN TO REDUCE TRANSFER PRICING DISPUTES

Advance pricing agreement (APA) rollback

The government has said APAs entered into for future transactions may be applied to international transactions undertaken in the preceding four years, under specified circumstances. The first APA with a rollback provision was signed in August this year, with a US multinational company.

  Only risk-based assessment on transfer pricing

CBDT has asked transfer pricing and assessment officers to take up cases based on risk assessment, instead of the transaction threshold of Rs 15 crore. Risk assessment allows authorities to look only at international transactions prone to tax evasion. Before transferring a case to the transfer pricing officer, an assessment officer must be satisfied that there is income or potential income arising from the case

Limiting cases handled by each officer

A transfer pricing officer (TPO) will be assigned a specified number of 'important and complex' cases, not exceeding 50. As of now, each TPO audits about 70 cases at a time. The government will frame guidelines to determine 'complex and important' cases

Range and multiple year concepts

The government incorporates a range concept and the use of multi-year data in transfer pricing calculations to reduce litigation and bring Indian laws in line with international ones. Earlier, single-year data would be considered and the arithmetic mean would be used

How will it work

Tax authorities will accept a price if it falls within a range, after comparing the price with that of comparable companies

How will it help

It will improve reliability of analysis undertaken for computation of ALP and reduce adjustments to cases in which transfer prices are outside the range. Multiple-year data will take care of price fluctuations

Sources: Ministry of Finance; Transfer Pricing Disputes Trends Report 2015 by Taxsutra & Deloitte