The Hindu Business Line : MNCs may welcome move to amend ‘transfer pricing’ law

The two proposals in the Finance Bill that seek to amend the law on ‘transfer pricing’ is certain to be welcomed by taxpayers, especially the multinational companies.

The Bill proposes to empower the CBDT to formulate what are called transfer pricing ‘safe harbour’ rules i.e. the circumstances in which the tax authorities shall accept the transfer pricing declared by the taxpayer.

The ‘safe harbour’ proposal recognises the principle that taxpayers could follow a simple set of rules under which a tax authority would automatically accept the ‘transfer price’ implicit in a transaction between two related entities if it falls within a defined parameter or a ‘safe harbour’ for such a transaction. That is to say, if the ‘transfer pricing’ result falls within that parameter, tax administrations would not make any upward adjustment to a price declared by the tax payer.

Beneficiaries

Multi-national technology companies that have established captive software development or back-office centres in India would be beneficiaries of this amendment. Most of these centres function as limited risk entities, typically remunerated on a cost plus basis. A ‘safe harbour’ for such transactions would typically identify a mark-up range on the actual cost incurred in rendering that service which would then be considered as a ‘safe harbour’ for transactions falling within it.

dispute resolution mechanism

The second proposal seeks to reform the dispute resolution mechanism currently in place which is time consuming and finality is attained only after a long drawn litigation. The Budget proposes to amend the Act to provide for an alternative dispute resolution mechanism which will facilitate expeditious resolution of disputes on a fast track basis. The proposal seeks to establish a dispute resolution panel (DRP) to address ‘transfer pricing ‘disputes. A number of companies, especially in the information technology sector, have been subjected to significant transfer pricing adjustments in recent audits. It is expected that the DRP would help in resolving transfer pricing controversies, without litigation, on a basis which is fair and impartial to both the tax administration and the taxpayer and in a manner that will enhance public confidence in the integrity and efficiency of the Panel.

Application range

The proviso to Section 92C(2) provides for a five per cent range, where the transfer price deviates from the arm’s length price. The application of the range has been a subject matter of several tribunal rulings in recent times, which have generally upheld the taxpayer’s position that the range allows a taxpayer to adjust the arm’s length price by up to five per cent, in case an adjustment is made by a tax authority. The Bill proposes to amend the proviso to clarify that only in a situation where the transfer price is within a five per cent, range of the arm’s length price, the transaction would be regarded as being arm’s length. If the transfer price falls outside the range, the adjustment would be up to the arm’s length price. To illustrate, if the transfer price is Rs 100 and the arm’s length price is determined at Rs 105, there should be no adjustment either under the existing provisions or the current proposal.

However, if the arm’s length price is determined as Rs 110, the new proposal would result in adjustment of Rs 10 (110-100), while under the existing provision, the taxpayer could have limited the adjustment Rs 4.5 (95 per cent of 110-100).

The proposals thus mark the continued evolution and sophistication of the transfer pricing legislation in India, and effectively address the need to minimise as well amicably resolve transfer pricing disputes at an early stage.

(The authors are international tax advisors with Ernst & Young India.)