The Hindu Business Line : Transfer pricing audits — Govt unlikely to do away with `secret comparable' practice

Secret comparables are basically benchmarks or information on comparable transactions obtained by the tax authorities from another taxpayer or source to be used during the transfer-pricing audit of a particular taxpayer.

For instance, if a multinational company were to submit a particular rate as its arm's length price for complying with transfer pricing regulations, the Revenue Department could compare this price with those of competitors or other sources to ascertain the fairness of the claim. The practice of secret comparables is not prevalent in all countries.

Turning down the demand of tax practitioners to drop this procedure, a senior officer of the Revenue Department said at an international tax conference here that the system of secret comparables was working well (with fair degree of transparency) and there was no reason to disturb it.

The official, however, admitted that transfer-pricing audits were a relatively recent phenomenon and there was need to improve the databases within the department.

In fact, Revenue Department officials involved in transfer pricing audits have expressed some concern over the reluctance of taxpayers to part with information on price-setting mechanisms as well as financial information on their associated enterprises in countries abroad. They point out that the domestic transfer-pricing rules require the taxpayer to furnish such information.

So far, the transfer pricing audit-cycle has been completed for only one year (financial year ended March 2002). The Revenue Department has made transfer pricing adjustments for about $230 million for the first year and in all about 1,000 cases were taken up for transfer pricing audits, according to Mr Samir Gandhi, Partner, Deloitte Haskins & Sells.

"This is only the second year of transfer pricing audit and we have a steep learning curve. In the first year, transfer pricing adjustments have been made in not more than 25 per cent of the cases taken up for audit," Mr B.M. Singh, Director General- International Tax, said.

Besides the issue of secret comparables, tax practitioners and tax heads of multinational companies are also keen that the Government establish a separate appellate mechanism for transfer pricing issues. They contend that a separate mechanism would put dispute resolution on transfer pricing issues on the fast track.