I-T transfer pricing wing disallows tax deductions sought by MNCs India arms.

How much should the Indian arm of Sony be charging its parent corporation for marketing its products? Or Suzuki Motor of Japan get from Maruti Suzuki here for use of its brand name?

If your answer is whatever they decide internally, the Central Board of Direct Taxes begs to differ. Or, rather, insists on differing whether the arms like it or not. At stake is a hell of a lot of money.

In the case of Sony India, for instance, the CBDT foxhound in question has proposed, in recent orders for the 2008-09 assessment year, adjustment of income upwards by as much as Rs 121.9 crore on account of the advertising and marketing promotion (AMP) expenses in 2007-08.

Theres a similar enhancement in income of Rs 311.9 crore of AMP deductibles for Maruti Suzuki and another addition of a further Rs 237 crore on payment of royalty for use of the Suzuki brand name. BMW India has been told to forget the idea of explaining why its like AMP expenses should be a lot lower the taxman has raised their taxable income for the year 2007-08 by Rs 48.7 crore.

The issue
Transfer pricing is the economists term for what is paid when goods or services are sold between different divisions of the same company or different companies within a group. One consequence of the economys globalisation, with every major and medium enterprise eager to become a multinational corporation or join hands with one, is to make this exercise hugely livelier than in earlier decades. And, with state treasury mandarins permanently on a hunt for ways to collar more revenue, the transfer pricing department of CBDT has little time or inclination for leisure.

Whence these huge adjustments in AMP and other expenses claimed by these companies as tax deductibles. Transfer pricing rules in most countries are based on what is referred to as the arms length principle to establish transfer prices based on an analysis of pricing in comparable transactions between two or more unrelated parties dealing at arms length The rules permit related parties to set prices in any manner but it is then the job of tax authorities to compare what is charged with prices or measures of profitability for transactions between unrelated entities. In the process, determining what is or what ought to be arms length.

How it works
The result is a feast for tax lawyers and rule drafters-cum-arguers. In each such case, the transfer pricing officer in question declares the calculations offered in defense as unacceptable , having exceeded as compared to the uncontrolled comparable as the edict goes in the case of Sony India here, with much more on these lines. In effect, deductible(s) disallowed, pay up. The department in question has made similar upward adjustments in the case of at least a dozen more majors, across the electronics, footwear, mobile (Nokia India has been told to consider its taxable income Rs 431 crore higher for the year in question), consumer goods and other sectors.

The companies in question did not reply to email sent to them by Business Standard for their comments on the adjustments made by the transfer pricing department. They have contested their respecive cases with the transfer pricing office. TP consultant Tarun Chaturvedi said after the TPO order, the assessing officers in question would formally issue the tax demands, which the companies can either accept or go to the dispute resolution mechanism, where the time taken to decide is within nine months. After which, the company pays or appeals to the tax tribunal. He says in a majority of cases, the outcome has gone against the companies.

The income tax department and its counterpart in charge of indirect taxes are under urgent orders to scramble for more revenue to plug an alarming fiscal deficit. And, say tax experts, transfer pricing adjustments have become a focus area of the I-T tax department for raising more this year.