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BW Businessworld

The Transfer Pricing Terminologies

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Lengthy litigation processes and uncertainty related to Transfer Pricing are the key concerns for the multinationals operating in India. While the landmark measure of Advance Pricing Agreement (APA) introduced in India last year is showing early signs of truce between the revenue and taxpayers on contentious Transfer Pricing issues, corporate in India would certainly welcome more of such reforms. 
 
 
Currently, the APA procedure in India enables taxpayers to pre-agree with revenue the arm’s length pricing methodology for future or prospective transactions. However, the procedure is of no relevance in reducing the possible litigation for immediate prior years. In this relation, the programme should be enhanced to cover past years by introducing the ‘rollback mechanism’. Based on the global leading practices, the rollback mechanism involves application of agreed Transfer Pricing to immediate past years (2-3 years), allowing taxpayers to preempt from possible litigations for the covered past period. This can be a win-win situation for both, as the taxpayers get to achieve certainty and save on possible litigation costs and the revenue can realise confirmed tax revenue and free up their limited resources from litigation processes. 
 
The APA regime could further be strengthened by introduction of Article 9(2) in relevant Double Taxation Avoidance Agreements (DTAAs) to facilitate bilateral APAs between India and other tax jurisdictions. Currently, India does not have Article 9(2) in its DTAAs with certain major trading partners including Germany, France, Singapore and the Republic of Korea. 
 
 
The scope of Transfer Pricing increased manifolds through the provisions of the Finance Act 2012, which expanded the coverage of Transfer Pricing to cover domestic related party transactions. The rationale of the domestic Transfer Pricing came from a Supreme Court judgement. The objective was to check possible tax evasion from transactions between domestic related parties wherein differential tax rates apply to such entities or any of the entities has accumulated losses.
 
The provisions introduced last year however also cover transactions which are outside of any possible tax evasion. These include transactions related to payment of director’s remuneration, donations, and transactions between entities that do not have any differential tax rates or tax holidays applicable to them. It is desired that such transactions be excluded from the applicability of domestic Transfer Pricing provisions. Further, there are certain areas related to domestic Transfer Pricing which require clarification such as, inclusion of specific definition for the terms ‘close connection’ and ‘any other reason’ in context of section 80-IA(10) of the Income-tax Act, 1961.
 
Further, keeping in line with the objective of the legislation, appropriate provisions related to correlative relief should be introduced for domestic Transfer Pricing. The correlative relief measures typically ensure that a Transfer Pricing adjustment in hands of one entity is reflected appropriately for the other transacting entity either in form of reduced income or enhanced deduction, thereby curbing the incidence of double taxation.
 
It is also expected that the variation range under second Proviso to section 92C(2), be specified for the year ending March 2013 at the earliest possible to bring to rest the much prevailing uncertainty in this regard. Also, the taxpayers eagerly await further provisions/ directions on the safe harbor rules introduced by the Finance Act 2009.
 
Phatarphekar is Partner (Tax-Transfer Pricing), KPMG India
The views and opinions expressed herein are personal
 
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