Tax advisors have welcomed the Budget proposal for introduction of Advance Pricing Agreement for transfer pricing. They say the Indian Tax Department has been increasingly aggressive in determining arms length profit margins for the IT-BPO industry.

The Department feels that the industry is shifting profits to more tax friendly jurisdictions. They say the captive arms of MNCs in India, for example, are adding more value than they are actually declaring so that they will be taxed less.

To determine the appropriate value added, the Department has been going by the ‘arm's length principle', that the captive units must provide services at the same price as a third party would to another unrelated party. Over Rs 40,000 crore is estimated to be locked up in transfer pricing dispute.

Mr Sanjay Sanghvi, partner at Khaitan & Co, said a well defined APA would provide certainty to taxpayers in terms of where they stand for possible tax liability in India.”

APA is a provision in the Direct Tax Code and is being proposed for implementation before the DTC itself. In APA, taxpayers and the Tax Department sit together and decide in advance what the transfer pricing shall be.

This is a very welcome step and will reduce Transfer Pricing litigation, said Mr Uday Ved, Tax Head at KPMG India.

Mr Partho Dasgupta, Partner, Tax Advisory Services at BDO, had earlier said that the authorities were looking at cost plus 25-35 per cent for captive units, which is “absurd and very high.” The introduction of APA will now encourage foreign investment.

> kripram@thehindu.co.in

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