JOIN USTo reduce litigation and to expand the scope of tax , the Centre has brought about many changes in the Budget
The Finance Minister presented the Finance Bill 2012 in the Parliament on March 16, 2012 proposing significant amendments in the transfer pricing regulations. Transfer Pricing regulations in India are presently applicable only to cross-border transactions. However, the budget has now proposed to extend the transfer pricing regulations to domestic transactions as well, if the aggregate value of transaction exceeds Rs 5 crore. This move is expected to further increase need for tax compliance in India.
In recent years taxpayers in India have been confronted with large scale litigation in transfer pricing. Latest estimates from press reports on the recently completed assessment suggest that the tax authorities have demanded to the tune of Rs 45,000 crore from foreign MNCs in India which was further compounded by conflicting judicial rulings.
The silver lining in the budget is the introduction of APA (Advanced Pricing Agreements) which is expected to provide certainty. An APA is an arrangement between the tax payer and the tax authority made prior to actual transactions, with a view to solve potential taxation disputes in a mutually agreed manner. The objective of an APA is to deliver certainty, for both the taxpayer and the tax authorities, of the tax outcomes of the taxpayer’s international transactions. Consequently, APAs provide a win-win situation for all the parties involved. The APA will be binding on both parties and would be valid for a maximum period of five years. The detailed rules and procedures would be notified by the Board.
The extension of transfer pricing regulations will now include certain domestic transactions. The Supreme Court in the case of CIT Vs Glaxo SmithKline Asia (P) Ltd has suggested that Ministry of Finance should consider appropriate provision to make Transfer Pricing regulations applicable to certain related party domestic transactions. The tax law, as it stands today, empowers the tax office to disallow unreasonable expenditure incurred among domestic group companies (or expressed as related party transactions) and empowers tax department to re-compute the income of a tax payer eligible for certain tax incentives based on fair market value. However, the law does not provide any method to determine reasonableness of expenditure or fair market value to re-compute the income of such transactions.
Budget 2012 proposes to extend the applicability of Transfer Pricing provisions to the above domestic transactions. For example, under the proposed amendments the transfer pricing officer will also examine payments made to directors and computation of income and allocation of expenses between related party undertakings claiming tax holiday. Whilst on one hand the proposals increases the compliance burden of the tax payer and, on the other, tax authorities do not allow the tax payer to obtain certainty as the tax payer is not entitled for APA on domestic transactions.
Transfer Pricing regulations are applicable to specified cross-border transactions referred to as “international transaction”. There has been some controversy on whether the definition of international transaction covers certain unique transactions pertaining to intangibles, business restructuring etc. Further, recent judicial decisions have held that Transfer Pricing regulations do not apply to transactions which are not specifically covered under the definition of international transactions as provided in the income tax law.
Therefore to provide clarity, the budget 2012 proposes to specifically widen the definition to include business restructurings, corporate guarantee and other financial transactions, advance, deferred payment and receivables, provision of marketing research, marketing development and other services. The definition has also widened the scope of intangible property to include transfer of ownership, trademark, rights, brands, customer lists, commercial secret, franchises, design etc. This amendment is proposed to be made retrospectively effective from the date of introduction of transfer pricing laws in India from April 1, 2001. In view of the ongoing transfer pricing litigation, the government in the Finance Act (No 2) 2009 had introduced an alternate dispute resolution mechanism to deal with transfer pricing disputes whereby a collegium of three commissioners of income tax was constituted for speedy resolution of disputes. However, the DRP did not meet its stated objectives and has not been very effective. One of the possible reasons commonly considered for this was that the directions of the DRP were binding on tax authorities and they could not appeal to the tribunal against any unfavourable decision. However, the taxpayer on the other hand could appeal to the tribunal against any unfavourable decision.
Budget 2012 has proposed to do away with this limitation and now allows the tax authority to file a further appeal with the tribunal thereby creating a level playing field for tax authority and tax payer.
The amendments proposed by Budget 2012 are a mixed bag for the tax payers. On one hand the regulation has been widened in definition and coverage of domestic related transactions but on the other hand the Budget 2012 has proposed to introduce APA which could be a game changer if implemented in the right manner.
(Samir Gandhi is Partner and Manisha Gupta is Director at Deloitte Haskins & Sells)