Transfer pricing audits: No review of threshold cap now
September, 25th 2006
Volumes seen to rise on more cross-border transactions
The Finance Ministry has no immediate plans to review the threshold limit for selecting cases for transfer pricing audits. It, however, expects more audit opportunities to come its way in the wake of increase in the volume of cross-border transactions over the recent years.
This stance of the revenue department would come as relief for trade and industry, which is keen on certainty in transfer pricing procedures and regulations.
"There is no immediate plan to review the existing threshold limit. There would, however, be more audits as the volume of international transactions are on the rise," Mr K.M. Chandrasekhar, Revenue Secretary, told reporters on the sidelines of `National Conference on Transfer Pricing' organised by Assocham here today.
He pointed out that the number of cases under transfer pricing audit and the amount of transfer pricing adjustment was on the rise.
In the first year of transfer pricing audit, i.e. assessment year 2002-03, the transfer pricing officers (TPOs) audited 1,000 cases and adjustments were made in transactions of 250 cases involving addition in the income to the tune of Rs 1,200 crore.
In the second year, the TPOs audited 1,500 cases and adjusted prices in 350 cases resulting in addition of Rs 2,300 crore.
Mr Chandrasekhar said that the transfer-pricing audit is now in the third year of its implementation.
The Finance Ministry a few months ago had hiked threshold limit for compulsory scrutiny of cross-border transactions (for transfer pricing audit purposes) from Rs 5 crore to Rs 15 crore. The threshold limit of Rs 15 crore is applicable for financial year 2005-06 and onwards.
Mr Chandrasekhar said at the conference that the procedure and the method of implementing transfer pricing norms in India are still at a nascent stage and it is expected that with the passage of time these will attain maturity. The Revenue Secretary admitted that "great deal of fine-tuning" might be called for in the data that was used by the tax department.
"One of the major challenges in the implementation of transfer pricing regulations is the non-availability of a reliable database which offers suitable comparables with regard to cross-border transactions.
A great deal of further information would be needed to draw the right comparables. I hope as we gain in experience, improvements in this regard would certainly follow," he said.
Mr Chandrasekhar also said the time is not ripe for introduction of advance pricing arrangements (APA) for transfer pricing purposes. APAs are in the nature of advance rulings that gives comfort on the pricing front to enterprises undertaking international transactions with associated enterprises.
The Central Board of Direct Taxes (CBDT) Member (legislation), Mr R.R. Singh, highlighted that the present provisions on transfer pricing have so far not been put to judicial scrutiny. In India, comprehensive legislation on transfer pricing was put in place in 2001.
Mr Singh said the CBDT wants the existing provisions to stabilise before they could be further fine-tuned. He, however, said the Board was willing to look into issues relating to definitions such as the one on `arms length price' even though they have been based on international experiences.