A. Benefit of the +/-5% range -– calculation simplified but the range could be narrowed down for the tax payer
Proviso to Section 92C of the Income-tax Act, 1961 (“the Act”) has been split into two distinct provisos instead of a single proviso. The first proviso clearly explains that where more than one arm’s length price is determined, the arm’s length price shall be the arithmetic mean of such different prices. The second proviso defines the range available to the taxpayer. These amendments have been made prospective, effective from October 1, 2009.
The above amendments have the following two critical implications to the tax payer where more than one price is determined to be the arm’s length price of its international transactions using the most appropriate method:
i) The option available to the tax payer in determining the arm’s length price of its international transactions has been taken away. The tax payer shall necessarily take the arm’s length price to be the arithmetical mean of the different prices; and
ii) There is a change in the manner of computation of 5% range allowed, in cases where there is a variation between the arm’s length price and the actual transfer price. The 5% benefit under the proposed provisions shall be applied on the actual transfer price and not on the arm’s length price. The variation allowed would be 5% from the transfer price. If the difference between the arm’s length price and the transfer price does not exceed this variation, the transfer price would be deemed to be the arm’s length price. This has been explained by means of an example below:
| Transfer Price (TP) | 114 |
| Arm's length Price (Arithmetic Mean) (ALP) | 120 |
| Existing Provisions | -5% |
| +/-5% Range would be computed on 120 | 114 to 126 |
| Since the Transfer Price of 114 falls within the range above | No adjustment |
| Proposed Provisions | |
| Variation between ALP and TP = 120 less 114 | 6 |
| 5% of Transfer Price = 5% of 114 | 5.7 |
| Since Variation between ALP and TP of 6 exceeds 5.7 | Adjustment to TP would be by 6 (120-114) |
B. Introduction of Safe Harbour norms
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With a view to ease out the administrative burden of transfer pricing documentation, in certain circumstances, an amendment, effective April 1, 2009 has been introduced in the Act by inserting Section 92CB. Considering the humungous transfer pricing litigations pending before the Appellate Authorities and the Courts in respect of a large number of cross-border transactions, the Central Board of Direct Taxes (“CBDT”) has been given the powers to formulate ‘safe harbour rules’ i.e. to provide the circumstances in which the Income-tax authorities shall accept the transfer price declared by the tax payer. This could mean that transfer pricing orders issued post April 1, 2009 would have to comply with these safe harbor norms and therefore may see revisions in a few cases.
It would also be interesting to note the type of safe harbours that will be ushered in. The safe harbours may be applicable for a specified category of tax payers with limited exposure to international transaction or it may be applicable to specific nature of transaction like routine services transactions on the lines of the US transfer pricing regulations.
It is pertinent to note here that, OECD TP Guidelines view ‘safe harbour’ with reference to transfer pricing as that which may vary from a total relief of targeted taxpayers from the obligation to conform with a country's transfer pricing legislation and regulations to the obligation to comply with various procedural rules as a condition for qualifying for the safe harbour. The variants could be two fold – a) certain transactions are excluded from the scope of application of transfer pricing provisions (in particular by setting thresholds), or b) the rules applying to them are simplified (for example by designating ranges within which prices or profits must fall).
C. Setting up of an Alternate Dispute Resolution Panel
The Finance Minister in his speech emphasized the need to create an alternative dispute resolution mechanism within the Income Tax Department with a special emphasis on resolution of transfer pricing disputes. In the broader sense, considering a need to further improve the investment climate in the country, the finance minister emphasized on the need to facilitate the resolution of tax disputes faced by foreign companies within a reasonable time frame.
A new section 144C has been inserted in the Income Tax Act with a view to achieve speedy and efficient disposal of transfer pricing cases. Under this new mechanism an Alternate Dispute Resolution Panel (ADP), comprising three Commissioners of Income Tax, will be constituted. The Assessing Officer (AO) before passing the final assessment order, which is prejudicial to the interest of the tax payer, will issue a draft order to the tax payer. The tax payer may file his acceptance to the AO or objection to the ADP along with the AO, in regard to the said draft order, within thirty days from the date of receipt of the draft order. The ADP will necessarily provide the directions to the AO within 9 months of such filing. The direction of ADP will be binding on the AO. Such an order of AO which is passed as per the instructions of ADP will be appealable to ITAT directly. The ADP is primarily an alternative to the Commissioner Appeals and will positively reduce the total time spent by the tax payer in the appellate procedures involved in the transfer pricing disputes.
The author is Transfer Pricing Partner & Leader, Grant Thornton India