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Finmin to set up appellate body for monitoring international taxation
June, 08th 2007

Keen to avoid a repetition of the fracas like that between Morgan Stanley and the income tax department, the finance ministry is planning to set up an appellate body for international taxation.
The authority will deal exclusively with rulings on transfer pricing, to ensure that arm's length price has been maintained in all transactions. This means multi national companies will get a more transparent and clear rulings on their business practices.

The body would be modelled along the lines of the already functioning authority of advanced rulings, that decides on all income tax issues. At present, advance rulings in the country are available only for income tax and customs.

However while the terms of reference and the consequent legislation are still to be finalised, it is likely that the authority would give decisions for only prospective transactions by non-residents and not stir a hornets nest by bringing existing transactions within its purview.

Commenting on the move, Vispi P Patel, executive director, transfer pricing Price Waterhouse Coopers said, This is surely a step in the right direction, but the authoritys terms of reference should ideally be wide enough to include both existing and prospective transactions.

New Era
The authority will deal exclusively with rulings on transfer pricing
The body will be modelled on the lines of the authority of advanced rulings
It may also augur advance pricing agreements
Also, while the authority would help lessen litigation and bring more certainty to transfer pricing regulations in the country, it is yet to be decided whether it would also act as the final arbitrator on all issues relating to transfer pricing.

In the Morgan Stanley case, the AAR had ruled that a portion of Morgan Stanleys global profits are not liable to be taxed in India as long as it paid an arms length price to the Indian subsidiary. The questions had arisen whether outsourcing to captive service providers would result in a permanent establishment (PE) coming into existence. The case has now been referred to the Supreme Court.

The authority may also be the harbinger for advance pricing agreements for companies in the form of Advance Pricing Agreements (APAs) with the authority, Patel added. They can either be unilateral or multilateral.

Transfer pricing refers to the value attached to transfers of goods, services and technology between related entities as well as to the value attached to transfers between unrelated parties, which are controlled by a common entity.

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