Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
Popular Search: Central Excise rule to resale the machines to a new company :: list of goods taxed at 4% :: due date for vat payment :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: form 3cd :: TDS :: articles on VAT and GST in India :: ARTICLES ON INPUT TAX CREDIT IN VAT :: cpt :: ACCOUNTING STANDARDS :: TAX RATES - GOODS TAXABLE @ 4% :: ACCOUNTING STANDARD :: VAT Audit :: VAT RATES :: empanelment
Transfer Pricing »
 New transfer pricing documentation rules and fiscal assessment procedure
 US, Mexico Agree Landmark Transfer Pricing Deal
 US, Mexico agree to transfer pricing framework for maquiladoras
 Indian tax official sees expanded role for BEPS inclusive framework, addresses transfer pricing local file
  Transfer Pricing analysis of professional services provided by related-party individuals and corporations
 Transfer Pricing analysis of professional services provided by related-party individuals and corporations
 FinMin to issue rules for norms under BEPS
  CBDT signs five unilateral advance pricing agreements
 UN tax committee to consider major updates to transfer pricing manual, model tax treaty
 CRA intensifies scrutiny of complex transfer pricing tax avoidance scheme
 New transfer pricing requirements in Poland

Cleaning up the transfer pricing mess
March, 27th 2015

Two important developments last week in the transfer pricing domain have the potential of completely transforming the way this critical and controversial tax area has been handled by the income-tax department.

One is the Delhi High Court judgment on tackling the AMP (advertisement, marketing and sales promotion) expenses involving a number of MNCs—to keep it simple, the Court has rejected the taxman’s methods for calculating the arm’s length price, and the other is the announcement of norms for rollback of Advance Pricing Agreements (APAs).

The problem, however, is that these two positive developments can help curb litigation or the huge, and in most cases high-handed, transfer pricing adjustments in the future, which total R2.64 lakh crore between FY06 and FY15, only if the government comes out with suitable supporting measures.

The Delhi High Court concluded in its judgment delivered on March 16: “Lastly, a word of caution is necessary that our findings or ratio should not be construed as an attempt to impart a talismanic precision to this complex issue which would to a large extent depend on the factual matrix of a given case. Disputes of such nature highlight importance of ‘safe harbour rules’, for they instil certainty and curtail litigation.”

But the fact of the matter is that not many companies have evinced interest in the ‘safe harbour’ window provided by the Central Board of Direct Taxes (CBDT), with only about 30 applications getting filed in the first year of its coming into force in FY14.

While the high ‘profit margin’ of 20-25% fixed by the CBDT has been one of the reasons for this, it is the characterisation of activities which has been a major dampener. Tax experts feel that the characterisation at present is more theoretical than practical and this needs to change.

The safe harbour rules notified in September 2013 provide 20% margin for IT & ITeS transactions up to R500 crore and 22% for transactions above R500 crore; for knowledge process outsourcing services, the operating margin is 25%; for outbound loans, the safe harbour interest rate is SBI base rate plus 150 basis points for loans advanced up to R50 crore, and for loans above R50 crore, it is the SBI base rate plus 300 basis points.

The safe harbour commission or fee for corporate guarantees up to R100 crore is 2%, and for transactions of corporate guarantee above R100 crore, safe harbour is available only if the wholly-owned subsidiary is rated to be adequate for highest safety and the safe harbour commission or fee is 1.75%. Then, the operating margin for contract R&D in software development is 30%, for contract R&D in generic pharmaceutical drugs it is 29%, and for the auto components manufacturer and exporter it is 12% for core auto components manufacturer and exporter and 8.5% for non-core auto components manufacturer and exporter.

These rules are applicable for five assessment years beginning FY14, but considering poor response, the CBDT would do well by quickly reviewing the safe harbour norms and coming out with a workable framework.

While this will help the small- and medium-sized companies get over their transfer pricing woes as they don’t mind paying higher margins to avoid compliance hassles, for large companies the APAs are the preferred route as they can negotiate lower profit margins for a longer period (five years) with the revenue department and also deal with tax authorities in other countries effectively.

But the record of the income-tax department in handling the APAs, too, has been poor. In the first year of the APA regime in FY13, the department received 117 unilateral and 29 bilateral APA applications; in FY14, another 206 unilateral and 26 bilateral APA applications were submitted; and the total number of APA applications pending with the transfer pricing office is expected to be about 500 now.

Of these, only five unilateral and one bilateral applications have been turned into APAs.

One of the reasons for slow progress on the APA front was a delay in the announcement of the APA rollback norms. With the CBDT coming out with the rollback provisions now, it is likely that the APA activity will pick up from here.

The bigger issue, though, in getting the APAs reach the final stage is the position papers (the APA proposals) prepared by the transfer pricing officials being stuck at the CBDT level. Those in the know of the situation say about 80 position papers are awaiting approvals from the top level, and once this is expedited, not less than 50 APAs could be signed quickly.

With the rollback norms in place, which will make APAs applicable for the previous four years—the CBDT is likely to extend the current deadline of March 31 to file an application for availing this opportunity—the government must ensure that all the 500 APA applications that have been filed are handled in a time-bound manner.

Once a strong APA system and a workable safe harbour regime is put in place, transfer pricing disputes and litigation will come down substantially.

The government, in the last few months, has shown that it is not wary of taking steps that help avoid fruitless litigation—not appealing the Bombay High Court’s ruling in the Vodafone and Shell transfer pricing cases in the Supreme Court has been a good example—and it is high time the taxman also moves faster on measures to take this to the next level.

Home | About Us | Terms and Conditions | Contact Us
Copyright 2016 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Web Application Development Web based Software Solution Web Application Deployment Web Application Solutions Web Application Software Development Web Application Deployment Web Application Programming Web Application Design and Development

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions