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The 2011-12 Union Budget, passed by Parliament recently, might boast of making easier arms length pricing discovery to the transfer pricing officer (TPO) across the country by enhancing his power through amendment and insertion of clauses and sub-clause of Sec 92 CA of the Income-Tax Act.
Hitherto the issue was that the starting point of reference to TPO is from Assessing Officer (AO) as per Sec 92CA. But in scrutinising the issue referred by AO, the TPO could now traverse beyond the remit and seek information that has scant relevance to transfer pricing discovery. The TPO is thus now empowered to go into such new issues that come to his knowledge in the course of proceeding u/s 92 CA.
Against this new development as set out in the Finance Bill 2011, auditors working with tax authorities for their corporate clients across the country are of the view that the transfer pricing machinery as it exists today in the country is not tailored to be tax-payer friendly for genuine firms doing legally permitted overseas business.
A Chartered Accountant on conditions of anonymity operating in the Southern region told Business Line that even in cases where the income of the assessee is exempt, the provisions of the transfer pricing are applied blindly and undue demands are made where there is no income at all.
Elaborating this predicament, the sources said that if a software company A transacts with company B, which is non-resident and controls the major share-holding of the company A, transfer pricing provisions come into play. B being in a commanding position pays 15 per cent profit to company A for the work it undertook for its clients, on which company A has to disburse tax or such tax that might be exempt u/s 10A/10 B of the I-T Act coming under the Software Technology Parks of India (STPI) scheme.
But the TPO deems that other companies in the software industry such as C, D or E, F might be getting 30 or 40 per cent profit and that derivatively company A should also fork out 30 or 40 per cent tax, as was demanded by the auditor's clients, the sources said.
“This is where the TPO arbitrarily makes a comparison of dissimilar performance and wrests a whimsical tax demand by imputing the performance of other companies into the company A,” the sources contended.
Thus, the company A has not only to pay heavy tax but also a heavier penalty, despite it being tax-exempt under the STPI scheme.
The sources argue that the TPO in such an instance abjectly failed to “ascertain functional difference, non-recurring items, risks involved, method of functioning and asset analysis among the companies he was freely comparing to make undue tax claims on a particular company since all these salient details are not available on public domain or in the companies' Web sites”.
They point out that how a company on the verge of closure for lack of overseas order or enjoying tax exemption as in the case of company A could get Rs 4 crore profit as gratuitously determined by the TPO? Even if it were true that the company made such a profit as arbitrarily determined by the TPO, where it could have stashed it? the sources quipped.
Stating that any such putative or presumed tax demand would distort not only Budget estimates of small companies but the economy as well, the sources said that even as the affected companies must perforce shell out substantial sum to obtain relief at higher forum by engaging experts.
Interestingly, the extant dispute settlement body, Dispute Resolution Panel (DRP), the higher forum to resolve the difference between the department and the tax payers has not provided any substantive relief even in a single case over the past couple of years it had been in existence.
With the tax exemption benefits being enjoyed by the companies located in STPI is petering out by the end of the current fiscal, the small software companies executing work orders for their overseas parent companies find that the additional power extended to TPO would only aggravate their woes in their frequent interface with the tax authorities, the sources said wryly.
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