The Union Budget 2012-13 just made life for companies like Tata Consultancy Services, HCL Group, Wipro, Aegis, Aditya Birla Minacs, Tech Mahindra and others, a bit more difficult.
The budget has extended the gamut of transfer pricing to domestic firms. This means transfer pricing will be applicable to all domestic transactions that these firms get into with their sister company from same group.
Thus, if a company belonging to a conglomerate, provides services to its sister company or a subsidiary, the transactions will come under transfer price audit. For instance, if TCS provides any services to Tata Steel, and whichever company makes more profit, will come under this ambit.
Or if Mahindra & Mahindra chooses to sell some of its vehicles to Tech Mahindra at a discounted price, the latter would be applicable for audit of transfer pricing due to higher profits made on that transaction.
According to the Finance Bill, tax authorities can recompute the income (based on fair market value) under Chapter VI-A and section 10AA, of the undertaking to which profit linked deduction is provided if there are transactions with the related parties or other undertakings of the same entity. The Bill further clarifies that the compliance burden will be applicable to transactions that will exceed threshold of Rs 5 crore.
Importantly, companies will now have to maintain proper documentation.
"The FM is bringing in all the transactions in group firms under transfer pricing. This will mean huge compliance burden, especially for promoter driven companies who have several associate party transactions. Transfer pricing has in the recent times become a large revenue earning route. But what remains to be seen is how the government intends to administer it," said Hitesh Gajaria, Partner KPMG.
Rostow Ravanan, CFO and Executive Director with MindTree believes that India would be perhaps the only country in the world where transfer pricing will be regulated for companies in the same country. “I think the intention of the government is to see that companies within a group do not get away or cheat the department. But if that’s the intention it has within the existing regulation enough power to audit companies. Why would it want to increase the burden of companies to document all transactions?,” said Ravnan.
This amendment will take effect from April 1, 2013 and will, accordingly, apply in relation to the assessment year 2013-14 and subsequent assessment years. What is bothering the industry is also the fact that the Finance Minister has not laid out any specific method to determine reasonableness of expenditure or fair market value to re-compute the income in such related transactions is provided under these sections.
"The domestic transfer pricing provisions will be applicable to industries such as IT, Power and Telecom. This is applicable in cases where firms are claiming incentives. So the IT industry which gets tax incentives under Section 10AA will come under this ambit as they also transact with their units that are not a part of such schemes (such as STPI units). You also have to remember that conceptually this provision has always been at the disposal of the tax authorities. There is now a requirement to maintain documentation to prove arms length pricing. For those who are able to demonstrate business being conducted on an arms-length basis, these provisions will not harm them," said Ravi Mahajan, Partner, Tax & Regulatory Services, Ernst & Young India.
Tax experts also point out that this may impact transactions that happen between a unit in an SEZ unit that gets tax exemptions and a unit that does not (for units that are in STPI). “Transaction between a SEZ unit and a non-SEZ unit will have to be documented if there is any,” points out Pranav Satay, Partner, Tax & Regulatory Services, Ernst & Young.
