Tax authorities are planning definite norms for pricing intangibles such as business promotion services and intellectual property to ensure that overseas firms dealing in these items in India dont take undue advantage of the lack of codified valuation methods.
The intangibles for which valuation norms are being framed include technology, brand name, trademark and services like market development. The valuation norms are expected to help the authorities determine the tax liability of firms engaged in transfer pricing.
Transfer pricing refers to the method of pricing goods and services or intangibles between an Indian firm and its related parties abroad. Valuation of services is essential as it determines the profits earned by a company and then the tax liability in India.
The pricing of intangible property, an issue of concern for the Central Board of Direct Taxes, is high on the government agenda as it hosts a three-day international conference on transfer pricing from Feb 17.
In the absence of a pricing policy, valuation of some services like development of market for a foreign firm in India becomes difficult. Ambiguity over valuation has also led to litigations, with a jump in number of cases from about 1,000 in 2004-05 to 1,800 in 2009-10. While many overseas firms operating in India are believed to be taking undue advantage of the situation, it is also a problem for foreign companies wanting to expand their presence in India, as it creates uncertainty over their tax liability here.
The three-day meeting would be attended by the finance minister Pranab Mukherjee, senior CBDT officials and revenue officials from other countries including those from the OECD member countries.
Finding out a way to price the services and other intangibles and training our officers in this regard has become essential as the government is losing lot of revenue with no concrete method for pricing of these items. A number of foreign firms providing such services in India are taking benefit of this, said a senior CBDT official.
Experts feel that India should get the transfer pricing regulations for intangibles like intellectual property and other ready also with regard to Indian companies which have a growing presence overseas.
There are no specific regulations in Indian laws on pricing of intangibles as of now. Currently companies either get it valued by a consultancy firm or other agencies. We also need to have the regulations in place as it is not only overseas firms that require it but Indian firms which have a presence in foreign lands also require these regulations, said Rohan K Phatarphekar, executive director and national head of Global Transfer Pricing Services for KPMG India.
Training the officials in this regard has also become important. We had started with 12 officers dealing with transfer pricing issues in 2004-05 and now we have 39 officers, said an official.
At the meeting this time, the members would aim at making a policy in this regard for the cost contribution arrangement and cost sharing arrangement between the companies to arrive at the right value of the service. Having realised the loss of revenue on this count, India had made a set of regulations earlier. In the Finance Act 2001 the country introduced a detailed transfer pricing regulations.
The basic idea behind these regulations is determining whether international transactions between associated parties are conducted at arms length price. Arms length price (ALP) is the price that would be charged when two companies are unrelated to each other.
The 2009 Budget proposed measures that would reduce the hardship of going through the current appellate process, reduce litigation costs and administrative burdens, and bring certainty in transfer pricing matters.