)
After a year of a record rise in transfer pricing disputes between the income tax department and multinational companies, the finance ministry on Wednesday announced a set of draft 'Safe Harbour Rules', detailing the circumstances in which the price declared by the taxpayer for cross-border transactions with an associated company would not be questioned.
The proposed rules, put up on the tax department's website for seeking comments, are broadly based on the recommendations of N Rangachary committee constituted by the Prime Minister in July 2012.
Companies are often suspected by the tax department of undervaluing the sale of goods and services to their foreign subsidiary to reduce profits and tax liability in India.
The rules are proposed to apply to six sectors-information technology, IT-enabled services, contract research & development in IT and pharmaceuticals, financial transactions-outbound loans, financial transactions-corporate guarantees, and automobile ancillaries-original equipment manufacturers.
To be applicable for the two assessment years beginning 2013-14, the rules will not apply to international transactions carried out with an associated enterprise in a tax haven.
"A taxpayer opting for safe harbour rules would not be allowed to invoke the Mutual Agreement Procedure provided under double taxation avoidance agreements," said revenue secretary Sumit Bose. He said the rules were expected to bring down litigation by providing certainty to taxpayers.
In the case of software development services and IT-enabled services where the total value of international transactions with the MNC parent does not exceed Rs 100 crore, tax officials would not question the income of the Indian unit if the operating profit margin declared is 20 per cent or more. However, if less than 20 per cent, questions may be asked.
The safe harbour for knowledge process outsourcing firms and contract R&D relating to software development is prescribed at 30 per cent. It is 29 per cent for contract R&D of generic pharmaceutical drugs. It is 8.5 per cent for manufacture and export of non-core automobile components and 12 per cent for core components.
S P Singh, senior director at Deloitte Haskins & Sells, said the percentages proposed seem to be on the higher side. He said for IT and ITeS companies which form a major chunk of transfer pricing cases, the ideal rate should be in the range of 14-15 per cent.
The finance ministry has put a provision that if a loan is given by an Indian company to its group company outside India and the loan amount is less than Rs 50 crore, the rate of interest should be equal to or greater than the base rate of State Bank of India plus 150 basis points. Singh said this was not in line with several decisions of the tax tribunals, which usually consider the Libor-dependent rate. The higher rate could become a sort of benchmark for loans.
Bishakha Bhattacharya, director of government relations at Nasscom, the IT sector's apex association, said they'd recommended a percentage between 12-14 per cent. "It's difficult to say right now if 20 per cent is too high, as we will have to see what the document proposes in terms of relief from audit, etc," she said.
"To positively impact dispute resolution, the margins or safe harbour rules might need to be recalibrated to a more acceptable zone. The exclusion of companies with turnover in excess of Rs 100 crore would limit the number of takers for safe harbour. The high safe harbour for automobile components and corporate guarantees might dampen the acceptability," said Vijay Iyer, partner, EY.
Of about 3,200 cases taken up for transfer pricing (TP) auditing in 2012-13, an adjustment of Rs 70,000 crore was made in 1,600 cases. In 2011-12, an adjustment of Rs 44,531 crore was made in 1,343 cases. This represented an increase of 57 per cent.
