More teeth to transfer pricing

Though Mr Pranab Mukherjee is trying to demystify Budget from tax perspective, every year there is something which makes the Budget special. Efforts to curb black money were quite perceptible in the speech by the Finance Minister.

Arguably, the most significant change that is proposed in the Finance Bill, 2011 is introduction of a new section, which would discourage use of certain tax jurisdiction for entering transactions relating to India.

Currently, the tax Department faces an uphill task in brining transactions involving jurisdictions to tax as they do not cooperate in concluding investigations by refusing to share information.

To make the whole exercise transparent, it is proposed that such jurisdictions will be notified in the Official Gazette.

The tax issue would be dealt with by two pronged actions — the transactions would become subject matter of transfer pricing investigation, even if those are not with otherwise group entities; and, second, income in the hands of the persons located in those jurisdictions would be subject to tax deduction which would be 30 per cent or higher.

The provision is silent on the issue of recipient being resident of a country with which India has tax treaty. One may consider it as treaty ride which may not be permitted. Further, the implementation of the proposed provision needs to be monitored by senior officers carefully.

Far-reaching changes

It is for the first time after its adoption in the Income tax Act, 1961 that several far-reaching amendments have been proposed for transfer pricing.

Considering that transfer pricing is not exact science, various countries have adopted different ways of dealing with it. Some have incorporated concept of inter-quartile range whereby any price in the middle two quartiles are considered acceptable arm's length price.

India adopted concept of plus or minus five per cent around the mean of arm's length prices when more than one arm's length price exist.

The adequacy of this range has been matter of dispute. It is now proposed to do away with this fixed range concept and leave it to be notified by the government.

As it has moved away from the hands of legislative to administrative organ of the country, a lot will depend upon how it is implemented. It is expected that the approach will be arrived at after due study and in a reasonable manner. If the approach is not announced urgently, then it will create uncertainty in determining the arm's length price

ITAT decisions

Another important change appears to be driven by a desire to undo certain decisions by Income Tax Appellate Tribunal.

Recently, in a couple of cases, the Tribunal decided that the power of the Transfer Pricing Officers is limited only to those transactions which are referred by Assessing Officer.

Under the existing provisions, an Assessing Officer forwards Accountant's Certificate filed by taxpayers to Transfer Pricing Officer (TPO).

Hence, effectively, it means that only those transactions which form part of the certificate can be looked into by the TPO. The Finance Bill seeks to extend the power of the TPO by providing that the TPO can suo moto take up a transaction for transfer pricing investigation. This will have a significant impact on the analysis of the business carried out by the subsidiaries of MNEs.

Availability of financial data of comparable companies for completing transfer pricing documentation on September 30 has always been a problem. To address this, the time limit for filing tax return and Accountant's Certificate for transfer pricing has been extended to November 30.

This measure will have the desired effect only if companies are made to publish their financial results well in time so that those are available in public domain much before November 30. If that does not happen, this amendment will be useless.

If the financial results of comparable companies of more than one year, without any condition, are allowed to be used, it will take care of the fluctuations in business as well as delay in reporting by companies.

With an intention to give more power to the TPOs, they have been provided with authority to conduct survey. This is good, if used judiciously and in good faith.

(The author is Senior Director, Deloitte Haskins & Sells.)

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