India Begins To Apply Transfer Pricing Rules

by Lorys Charalambous, Tax-News.com, Cyprus

01 July 2005

India's Income Tax Department has become very active in enforcing transfer pricing laws, issuing additional tax demands of more than Rs 400m on international companies in the first full year of new legislation.

The companies involved include Samsung, HLL, Sony, Bank of America, Coke, Microsoft, and Hero Honda. Jointly, the Income Tax Department has assessed additional income of Rs 1,200m on such corporates.

The companies however don't agree. Samsung for instance says that there has been an incorrect interpretation of the transfer pricing law and has appealed to the Comissioner of Income Tax, followed by HLL, Coke and Hero Honda.

Almost all foreign banks have been assessed with extra income, totalling more than Rs 70m. Tax Department sources say that when on-spot surveys were carried out, many banks were found to have provided services free of cost to foreign head offices.

The Finance Act 2001 introduced detailed Transfer Pricing Regulations in India as of 1st April 2001, to apply as from the assessment year 2002-2003.

Income arising from international transactions has to be computed having regard to arm’s length pricing. Costs or expenses allocated or apportioned between two or more associated enterprises also follow an arm’s length rule.

The basic criterion determining whether an enterprise is 'associated' is participation in management, control or capital (ownership) of one enterprise by another enterprise. Participation may be direct or indirect or through one or more intermediaries. It appears that one may go to any layer of management, control or ownership in order to find out association.

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