The income tax department has scaled down its estimate of income suppression by multinational corporations in India in the 2014-15 audit of intra-group cross-border transactions to Rs 47,000 crore, a steep 22% decline from the extra taxable income the department had attributed to the firms in the previous audit.

The department had in that audit claimed that Indian arms of MNCs had under-reported income by R60,000 crore by overpaying foreign associates or by receiving below-industry-standard payments from them.

This year’s audit result shows that “high-pitched income assessments” are no longer the norm as the amount of income addition is declining in spite of a sharp increase in the number of companies audited. The R47,000-crore addition the department has proposed in the latest audit is from 4,300 cases compared with 3,600 audits in the previous year that had resulted in a higher addition that year, sources privy to the development told FE.

Any deviation from the industry standard of payments or receipts (the arm’s length price) is used by the department to make adjustments to MNCs’ income leading to a 30% tax demand on the additional income. This often leads to double taxation as the parent or associate does not get tax credit in its country for the extra taxes paid here due to such income adjustments. Most income additions are on IT and IT-enabled services companies and FMCG and electronic goods companies that incur advertising, marketing and promotional expenses way above industry standards. The audit result also shows that the tax department is implementing finance minister Arun Jaitley’s assurance of a stable and predictable tax regime bereft of far-fetched demands that bring a bad name to the country instead of revenue.

Many companies that received notices for income adjustments as part of the latest audit would soon get relief, further bringing down the overall additions proposed. That is because many of the proposed income adjustment cases pertain to sale of shares at discount and were communicated to companies before the Union Cabinet decided on January 29 that share transactions are on the capital account and do not result in income no matter what valuation method is adopted. “These cases will get knocked down at the dispute resolution panel (DRP) itself,” said a person privy to the development. DRP is a collegium of quasi-judicial officers within the department that settles disputes outside courts.

The Cabinet had clarified that proceeds from share issues to foreign associates is capital receipts and not income. It had also decided not to pursue far-fetched tax demands on Shell and Vodafone arising from their share sales to overseas associates.

The 2014-15 audit pertains to transactions executed in the 2010-11 fiscal as there is a time lag between the financial year and the audit year.