The issue of transfer price affects various types of taxes. Under Custom Laws, special valuation branch examines the validity of the transaction value between associated enterprises. In Service Tax law, service tax has been imposed on import of service through reverse charge method and it is expected that Service Tax department would like to examine the value of services imported (or exported) to associated enterprises. In Income Tax, it is transfer price mechanism which takes care of this situation.
New Direct Tax Code makes sweeping changes in the transfer price mechanism.
Definition of Associated enterprises: The definition of Associated enterprises has been modified and requirement of direct or indirect shareholding has been reduced to 26% to 10%. A loan to other enterprise in book value share has been reduced to 26% from 51%. Power of appoint directors has been reduced to more than half to more than one third. Dependence of raw material has been reduced to two third from 90%. These changes will increase the number of transaction falling under transfer pricing mechanism.
Making stringent penal provision: The penalty provision has been made more stringent. Penalty for non filing of accountant report has been increased from 50K to 200K. Penalties for non maintenance of documents have been increased (50K to 200K) and non furnishing of documentations (5K to 100K).
Advance Price Agreements: The code makes proposal for advance price agreement between tax assessor and tax payers. If the taxpayer enters into this agreement with Board, the price shall be determined as per that agreement. This provision may bring in certainty and consistency in the transfer pricing provision with respect to the transactions covered in the agreement. We have to see how scheme is formulated in this regard and how the scheme is implemented on the ground.
Safe Harbor Rules: New Direct Tax code proposes safe harbor rules in determination of arm length price. Adoption of Safe Harbour rules, absolves the taxpayers from the burden of a detailed benchmarking analysis for transfer pricing while retaining the onus to maintain documentation for intra-group transactions. It will be interesting to observe the likely form in which the proposed rules would be introduced in India as far as the scope, applicability, extent, documentation and related compliance issues are concerned. Introduction of Safe Harbour Rules is a welcome step, which by provides for certainty, and will help resolve the avoidable disputes between the taxpayer and the tax authorities. Moreever, the certainty and administrative convenience offered by these Rules would be an additional incentive. These rules will also help is reducing the compliance cost of the tax payer with transfer pricing regulation. It is expected that the rules shall be framed keeping in mind the internationally accepted accounting principles and transfer pricing regulations.
These changes are far reaching and result in greater scrutiny of international transaction and at the same time will bring transparency, certainty and equity in transfer pricing regulations in India. An equitable tax structure is a sine qua non for an attractive investment destination.
Written by:- Advocate Rajesh Kumar. The author can be contacted on The author can be contacted on custom.excise@gmail.com , Web: www.rajeshkumar.co.in
(Article was First Published on 11th November 2009.)
“The issue of transfer price affects various types of taxes. Under Custom Laws, special valuation branch examines the validity of the transaction value between associated enterprises. In Service Tax law, service tax has been imposed on import of…”
Above write-up (republished by TG) obliges one to give it a second but fresh look on one area propping up, though not seemingly thought of. That has something to do with the conflicting philosophy, rules and regulations independently framed/enacted and sought to be implemented and enforced by the two concerned regimes namely,
income taxation and customs duty.
The multitude of material available in public domain might suffice for anyone interested to embark on a lifelong research on the subject area; albeit turnout to be an inconclusive one.
The following abstract from one such source may help in having a glimpse of it:
Q
For multinational companies, dealing with either tax authorities or customs administrations can be a major headache. So how about serving two masters at the same time? Surely it would not be easy. In the cross-border business environment, it is not uncommon to see multinational companies struggling with the conflicting demands from tax authorities and customs administrations. Indeed, the conflict between transfer pricing and customs valuation is attracting attention from various stakeholders, including tax practitioners in the game. The solution to this conflict varies with countries.
UQ
It seems, therefore, that any discussion or deliberation, more so any policy or enactment, exclusively on the subject of ‘transfer pricing’, as divorced from customs duty implications, is unlikely to serve a useful purpose; instead, might eventually turn out to be incomplete and ineffective in every sense, thereby perpetuating the largely obtaining conflict .