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New transfer pricing rules to be less taxing
November, 20th 2015

The declining trend in the income tax department’s estimates of alleged income suppression by multinational companies would get buttressed, thanks to the new set of transfer pricing (TP) rules issued earlier this week.

The declining trend in the income tax department’s estimates of alleged income suppression by multinational companies would get buttressed, thanks to the new set of transfer pricing (TP) rules issued earlier this week.
Currently, transfer pricing adjustments become necessary when the transaction price with related parties abroad reported by a company varies from the arm’s length price or a benchmark industry standard beyond a specified limit (+/-3%). As per the new rule, however, if the price being audited falls between 35th and 65th percentile of the data set, it would be considered as arm’s length price and so no TP adjustments would be needed.

Under the Income Tax (16th Amendment) Rules, 2015, a “range concept” is introduced, which means the taxman would use median of six comparable transactions by other players in the industry to compute the extra taxable income, instead of the average or the arithmetic mean of the comparable prices. Since the median of the comparable prices could often be closer to the transaction price being audited compared to the average of the selected prices, any extra income that may be attributed to the MNC for deviating from the arm’s length price may be smaller than what is currently being attributed in many cases.
transfer-pricing

TP adjustments sought by the I-T department had grown exponentially from R1,220 crore in 2005-06 to over R70,000 crore in 2012-13 but has since declined to R47,000 crore in 2014-15. While MNCs have expressed concern over the rise in TP adjustments, the tax officers have been advised by the government to refrain from high-pitch assessments that could drive investors away. The fact that the revenue department’s TP figures routinely got struck down by tribunals and courts also forced it to be more realistic. As reported by FE recently, the Central Board of Direct Taxes (CBDT) has directed its field officers to refrain from manual selection of transactions for scrutiny based on the threshold value and instead restrict audit to cases only where the revenue risk to the government is huge. Also, an assessing officer will have to give a structured opportunity of hearing the taxpayer before a case is referred to a transfer pricing officer.

“The introduction of range concept and the use of multi-year analysis is expected to have a significant favourable impact on transfer pricing compliance and litigations,” said Rahul Mitra, national head, litigation and dispute resolution, transfer pricing and direct taxes, KPMG India.

“Though it has come a bit late in the day, finalisation of rules is a welcome step. The explanation with elaborate illustrations is helpful in reducing ambiguity,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates.

 
 
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