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New transfer pricing rules to lessen tax disputes, attract investment; IT, auto companies to gain
September, 19th 2013

India unveiled a new set of rules on Wednesday to rein in transfer pricing disputes involving multinationals, in line with Finance Minister P Chidambaram's budget pledge and as part of moves to revive overseas investor confidence.

Under the so-called safe harbour rules, income-tax authorities will not question the pricing of transactions between multinational companies and their subsidiaries under certain situations, which will benefit a host of sectors such as IT and ITES (Information Technology Enabled Services), pharmaceuticals and automobiles.

"These rules will provide certainty," Revenue Secretary Sumit Bose told reporters in New Delhi. "The idea is to ensure there is less litigation." Industry and tax experts welcomed the rules, saying they met expectations. The rules that were notified on Wednesday have been modified from the initial draft to make them more friendly to industry, which had raised objections when the proposed norms were released for public comments last month.

Chidambaram, who had promised a non-adversarial tax administration soon after taking over in August last year, had pledged to issue the safe harbour rules to address transfer pricing disputes in this year's budget.

The new rules will be applicable for five years beginning assessment year 2013-14, instead of the two years specified in the draft. Most of the recommendations made by the Rangachary panel set up by the prime minister have been accepted. The suggestions were made in July.
New transfer pricing rules to lessen tax disputes, attract investment; IT, auto companies to gain
Transfer pricing refers to what related entities charge each other in cross-border transfers of goods and intangibles such as brands or services. There has been a surge in tax disputes related to the practice in past few years as the country sought to maximise revenues. This had the unintended consequence of India coming across as a combative tax administration, discouraging overseas investors.

Transfer pricing adjustments stood at Rs 70,000 crore in 2012-13, Rs 67,768 crore in 2011-12 and Rs 43,531 crore in 2010-11 with disputes related to Royal Dutch Shell, Vodafone and Nokia grabbing the headlines.

Though these transactions are supposed to be priced according to an arm's length principle — what it would cost if the purchase was from a non-related party — how this is determined is often a matter of dispute. Experts said the new rules will help ease the concerns of overseas investors.

"This is a very positive move. Last one-and-a-half years we heard lot of noise on having a stable and non-adversarial tax regime. This is the first significant step in that direction," said Dinesh Kanabar, deputy CEO of KPMG in India, who was also member of the N Rangachary panel on safe harbour rules.

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