In what could further spook multinational companies (MNCs) operating in India, the income-tax (I-T) department has notified a revised form to check for transfer pricing infractions, something that could intensify the scrutiny on their books.

The new form explicitly requires companies to disclose specific international transactions even if they do not have any impact on profits.

Analysts said this will force companies to disclose all business transactions such as the issue or buy-back of shares or details of restructuring.

Transfer pricing refers to the practice of arm’s length pricing for transactions between group companies based in different countries to ensure that a fair price—one that would have been charged to an unrelated party—is levied. It has been an area of increasing dispute in India with the tax department aggressively pursuing such cases.
The government had attempted to widen the definition of transfer pricing in last year’s budget by including domestic transactions and making it clear that it wasn’t necessary that international transactions should have a tangible impact on income to come under the purview of transfer pricing provisions.

However, the tax department had not effected any changes in the reporting requirements last year, which enabled many companies to avoid disclosing such transactions. Taxpayers are required to obtain and file an annual transfer pricing certification in Form 3CEB by 30 November.
The tax department, through its revised reporting requirements, has now tried to plug this loophole.

The revision in the format comes in the backdrop of the tax department’s increased scrutiny on share valuation cases in its audits last fiscal. The I-T department issued notices to 26 companies, including Shell India Pvt. Ltd, HSBC Securities and Capital Markets (India) Pvt. Ltd and Standard Chartered Securities (India) Ltd, in 2012-13 for under-pricing an intra-company share sale, according to the I-T department.

“Most of the companies were taking a stand that purchase or sale of shares between group companies did not lead to any taxable income and refrained from reporting such transactions. Now, the income-tax department has inserted this specific disclosure requirement in this form. Companies will have no option but to disclose such transactions,” said Karishma Phatarphekar, partner and practice leader (transfer pricing services) at Grant Thornton India LLP. “The companies will even have to file business structuring agreements along with this revised transfer pricing form, something that was not required till last year.”

Many firms undertake business reorganizations that may lead to a reduction in the profits of the Indian entity. They will now have to file their detailed business structuring agreements with the tax department.

As per a 10 June notification from the Central Board of Direct Taxes regarding international transactions, separate requirements have been introduced for guarantees, issue of equity shares, business restructuring or reorganizations and deemed international transactions.

With respect to domestic transactions, a separate section has been introduced in the form, seeking information on details of the associated enterprises, including business description, the nature of the relationship, description of the transaction, along with quantitative details and the transfer pricing methodology, PricewaterhouseCoopers said in a note.