Introduction of the concept of advance pricing arrangements (APAs) in the tax statute is regularly been in the Budget wish-list of multinational enterprises since 2001, when the transfer pricing legislation was enacted, APAs are essentially an advance ruling by which tax authorities agree upfront to the pricing of goods and services between the related parties. This ruling becomes binding on the tax authorities and the taxpayer.
Although the Government had indicated intent to introduce APAs in the proposed new Direct Taxes Code, tax experts feel that any legislative amendment to introduce this concept in the coming fiscal will be a welcome step.
The other areas in transfer pricing where detailed guidelines are required include valuation of intangibles and cost contribution arrangements, say tax experts. These can be done through administrative rules and no legislative amendments are required, they point out.
Without going into specifics, the Central Board of Direct Taxes (CBDT) Chairman, Mr S.S.N. Moorthy, told here that there is scope to narrow the gap between Indian transfer pricing regulations and the Organisation for Economic Development and Co-operation (OECD) rules. He, however, made it clear that India was not looking to entirely adopt the OECD transfer pricing guidelines.
So what are the main differences between the existing Indian transfer pricing regulations and OECD guidelines? “Although there is more consistency, there are three to four significant differences. Indian regulations are restrictive on the transfer pricing methods that can be used for the establishment of Arms Length Price. Currently, only five methods can be used under Indian regulations. The OECD guidelines provide more flexibility,” Mr Rajendra Nayak, Tax Partner, Ernst & Young, told Business Line.
He also pointed out that in situations where more than one price is determined by the most appropriate method, the ALP under the Indian transfer pricing regulations will be taken to be the arithmetical mean of such prices.
However, OECD recognises a number of other statistical measures too, such as inter-quarter range and median, which are not allowed under Indian regulations. Mr Nayak also highlighted, in the Indian context, the absence of detailed guidelines for valuation of intangibles and intra-group services.
Mr Aseem Chawla, Partner, Amarchand & Mangaldas, said that a significant difference between Indian transfer pricing regulations and OECD guidelines was that in the former, the scope of “associated enterprises” was higher.
India has been holding an observer status in the OECD committee on fiscal affairs since 2006.