13 March 2013
Economy
Expert Speak
Interpreting 'Transfer Pricing' rules in India
Evolving rules; APA mechanism holds promise; Belt tightening world over
The issue of transfer pricing has hit headlines in recent times with a rising number of disputes
involving frontline domestic and international companies. For a perspective on this issue, we
organized a concall with two luminaries in the area of transfer pricing and international taxations,
Mr Mukesh Butani and Mr Amod Khare, from BMR Advisors. We present the key takeaways.
Indian Transfer Pricing laws based on OECD guidelines; Belt tightened elsewhere too
Indian transfer pricing (TP) laws are based on OECD guidelines which too are evolving.
Seen simply, transfer pricing laws prevent shifting profits from high tax jurisdiction to a
lower one.
Indian TP laws are operational since 2001 that defines its applicability.
While a host of TP issues has affected companies and investors, belt tightening on TP laws
in recent years is a worldwide phenomenon.
Devil is in the detail - specifics of India
Indian laws have detailed guidelines to determine the Arm's Length Price (ALP) based on
five methods.
However, normally it is the Transactional Net Margin that is most widely used. It involves
comparison of the margin earned by the tax payer vis-à-vis the net margin earned by
comparable companies under similar circumstances.
The laws also prescribe procedures for the tax payer and tax department to compute tax
liability and demand, respectively.
A detailed process of remedy for tax payers with various layers of appeal is also possible
under the law.
Disputes due to interpretation of economics, laws, implementation
As TP becomes important as a source of revenue, there are increased disputes.
In most cases it is the differing perspectives on the economic basis of transactions that
result in disputes.
Thus, the choice of comparables to determine the Arm's Length Price (ALP) becomes the
key issue to the dispute.
Lagged enactment of the law and proactive tax officials have increased the incidence of
disputes.
This has resulted in a pile-up of disputed cases.
Way forward - APA mechanism holds promise
The Advance Pricing Agreement holds the promise of a true game changer. This is an
agreement that the tax payer enters with the Advanced Pricing Authority and it broadly
ensures that the transfer prices worked out are not questioned again by the tax
administration.
The 2012 changes in the Dispute Resolution Panel (DRP) rules, that makes it more even by
allowing appeal by the tax department too, hold the promise of faster and more balanced
orders (earlier only the tax payer was allowed to appeal thus making DRP biased towards
the tax department).
Besides, tax payers need to be cautious and maintain a checklist.
As a specific example, the Vodafone issue is likely to be settled with some compromise.
Incidentally, the Finance Minister in his post policy media interactions highlighted that the
offer of conciliation from Vodafone is under Cabinet's consideration.
Mr Mukesh Butani
Mr Mukesh Butani is an
acclaimed expert in the
areas of international tax
transfer pricing and Indian
tax & regulatory policies.
He has significant
experience in advising
Fortune 500 multinationals
and Indian business
houses. He is associated
with numerous national
and international tax
bodies and is a member of
the Advisory Group on
International Tax and
Transfer Pricing constituted
by the Indian Ministry of
Finance.
Mr Amod Khare
Mr Amod Khare is a partner
in the firm's Direct Tax and
Transfer Pricing practice.
Previously he was with
Ernst & Young and
Andersen. He has
significant experience in
advising clients in the
media and entertainment
industry on tax, transfer
pricing and regulatory
issues.
Dipankar Mitra
(Dipankar.Mitra@MotilalOswal.com); +91 22 3982 5405
Investors are advised to refer through disclosures made at the end of the Research Report.
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