India Gets Tough On Transfer Pricing

by Lorys Charalambous, for LawAndTax-News.com, Cyprus

27 April 2006

India has stepped up transfer pricing audits this year, and unofficial reports surfacing in the local press suggest that demands for more than Rupees 2.5 bn (US$50m) have been slapped on multinationals operating in India in respect of the 2002/03 tax year.

The country introduced transfer pricing anti-avoidance rules (broadly based on the OECD guideliens) and an audit regime in 2001, under the basic 1961 Income Tax Act, but did not begin to conduct audits until last year, and then they covered the 2001/02 tax year.

In 2005, the tax department is said to have raised demands for Rupees 1.2 bn, but had recovered only Rupees 100m by the end of the year.

According to the Times of India, demands issued this year already include one for Rupees 350m against a foreign bank. The tax department says that very frequently it finds excess profits generated in offshore holding company locations, so that products or services are imported to India at inflated prices, reducing taxable profits in the country.

Companies in India complain that there is no formal appeal process for transfer pricing; and there is no APA (Advanced Pricing Agreement) system to simplify negotiations with the tax authority. However, tax demands are still subject to a possibly long-drawn-out litigation process in the regular courts.

Any taxpayer having international related-party transactions exceeding Rupees 50 million (US $1.1 m) is liable to transfer pricing audit. Experience so far suggests that the tax authorities take a hard-line attitude towards international pricing issues, for instance insisting on the use of 'secret comparables', denying 5% safe harbours, refusing to accept pricing agreed by other departments, and refusing to accept Transactional Net Margin Method analyses based on the 'simpler party' principle when that party is outside India.

"This is only the second year of transfer pricing audit and we have a steep learning curve. In the first year, transfer pricing adjustments have been made in not more than 25 per cent of the cases taken up for audit," Mr B.M. Singh, Director General- International Tax, told an international tax conference recently, replying to complaints from taxpayers.

Well, at least the lawyers will win.

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