The government has directed the Central Board of Excise and Customs (CBEC) and the Central Board of Direct Taxes (CBDT) to jointly track cases of transfer pricing. Both departments have found that many companies engaged in exports and imports have cited different data to Customs and income tax.
While the cost of goods is undervalued for the purpose of paying Customs duty, the same cost is increased substantially to reduce the taxable profit, sources close to the development said.
It has been also found that out of the total cross-border transaction, almost 60 per cent transactions are related party (relevant to transfer pricing). Out of the total Customs revenue collection of around Rs 60,000 crore, Rs 36,000 crore belongs to related party transactions.
Related party transactions in transfer pricing refers to dealings with known entities like a foreign company and its Indian subsidiary or an exporter of an Indian company among others.
In such cases, the tax department has to check whether the valuation of the cost of goods purchased from the foreign entity or loans taken by the Indian subsidiary from the parent or any related party deal are done at an arms length basis.
Arms length pricing means valuation of the goods from related parties should be done at the relevant market price within a margin of 5 per cent on either side as if the transaction is done in the market, explained an official source.
To this effect, data on related party transactions will be shared by both the departments followed by bi-monthly meetings.
Further, CBEC has decided to simplify the procedure for audit of imports. The current practice involves monitoring each and every import through debit in a bond for every transaction and collecting revenue deposit for each bill of entry.
The board now has recommended to the government for switching over to a system of periodic audit of imports, as is the case with income tax. Thus there will be no practice of debiting bonds or revenue deposit for bills of entry, which will substantially cut down the paper work, added the source.