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Central Board of Direct Taxes panel to formulate
January, 11th 2010

The Central Board of Direct Taxes (CBDT) has set up a committee to formulate rules for the safe harbour provisionsa set of rules that would enable the income tax (I-T) authorities to accept the transfer pricing returns without scrutiny.

Transfer pricing refers to the price at which one arm of a company, usually a multinational corporation, transfer goods or services to another division of the same organisation in order to calculate each arms profit and loss separately.

Chaired by director-general of international taxation, the committee comprises of senior tax officials and representatives of trade and industry as well as Institute of Chartered Accountants of India (ICAI). The objective of the committee is to set conditions under the safe harbour rules to facilitate acceptance of a transfer pricing return without scrutiny. Foremost among the committees task is to set an acceptable margin which would act as a benchmark for the industry.

For example, if the safe harbour rules stipulate that the margin in a particular industry is 20%, and if the transfer price declared by a company, engaged in the that industry, is not less than the margin, the I-T authorities would accept the return without questions.

However, experts feel that the margins should not be rigid. Deloitte India partner Samir Gandhi told ET: If a company reports a margin which is less than the stipulated benchmark, the authorities should give the enterprise an opportunity to defend its case.

The rules, once introduced, will lend an investment friendly image to India. It will also put an end to the requirement of collecting huge amount of data regarding transfer pricing transactions, thereby saving time and energy.

Tax regimes of many developed nations such as Australia, New Zealand and Canada have incorporated safe harbour rules in their tax laws to provide clarity on the tax liability of multi-national companies operating in their countries.

TP Ostwal, a senior chartered accountant said: It is high time India looked at safe harbour provisions. Several developed nations have their own safe harbour rules.

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