Transfer Pricing Provisions were introduced in India by the Finance Act 2001 so as to protect India’s rights to collect fair share of tax in respect of cross border transactions. In simpler terms, TP Provisions were introduced to ensure that an international transaction between two associated enterprises is made at arm’s length price (ALP) so that both the countries involved get proper share of profits in their respective jurisdiction.
The provisions to compute ALP are contained in section 92C of the Income-tax Act. It contains various methods which may be followed by an assessee for the purpose of computation of ALP to justify that the transactions entered into are at arm’s length. Proviso to section 92C(2) provides for a margin of 5 per cent if the actual international transaction cost is at variance from ALP calculated. In other words, if the ALP calculated as per the provisions of section 92C is within 5 per cent of the actual transaction price, then, no adjustment is required.
However, this leverage of 5 per cent has not been considered adequate by the various assessees in different industries. The problem got further aggravated by a departmental view that the benefit of 5 per cent is available only when more than one ALP is determined. Therefore, where only one ALP is determined, the difference between the ALP and the international transaction price will be added to the income of the assessee without allowing any margin.
It is unfortunate that TPOs are taking full advantage of the confusion prevailing in drafting of the law. This has resulted in severely high pitched assessments by the TPOs.
The aforesaid position and the difficulties of the tax payers have also been fully recognized by the Government. The Memorandum explaining the Finance Bill 2009 specifically took note of the difficulties faced by the assessees. It provided as under:
“Section 92C of the Income-tax Act provides for adjustment in the transfer price of an international transaction with an associated enterprise if the transfer price is not equal to the arm's length price. As a result, a large number of such transactions are being subjected to adjustment giving rise to considerable dispute. Therefore, it is proposed to empower the Board 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 assessee.”
It was, therefore, expected that in view of the problems of the assessees, the Government will introduce Safe Harbour Rules in the Budget 2011. The Safe Harbour Rules shall provide the circumstances in which the Income-tax authorities shall accept the transfer price declared by the assessee.
It is however surprising that the Budget 2011 has proposed amendment in the TP provisions, but instead of introducing safe harbour rules, the Budget has tempe-red even with the margin of 5 per cent. The following observations in Memorandum clarify the position:
“A fixed margin of 5 per cent across all segments of bus-iness activity and range of international transactions has out lived its utility. It is, therefore, proposed to amend section 92C of the Act to provide that instead of a var-iation of 5 per cent, the allowable variation will be such percentage as may be notified by Central Government in this behalf.”
It is disheartening to note that no clear relief has been provided to the assessees against high pitched TP assessments. Infact the Budget has left the assessees at large at the mercy of the CBDT.
The aforesaid amendment has driven the assessees from an unrealistic arbitrary position to a chaotic position. Under the existing law, a margin of 5 per cent is allowed to the assessees upto Financial Year 2010-11. However, in respect of Financial Year beginning from April 1, 2011, no margin will be available to the assessees, until the Government notifies the margin. The new financial year is about to commence in a few days’ time. Therefore, the Government should notify the margins without any delay, so that the transactions can be carried out by the assessees in accordance with the permissible margins from the very beginning of the relevant financial year.
(Author is a Sr. Partner in S S Kothari Mehta & Co.) Email: hp.agrawal@sskmin.com
