Indian Tax Authorities Step Up Scrutiny Of Multinational Firms

by Lorys Charalambous, Tax-News.com, Cyprus

04 January 2006

Reports in the Indian press have revealed that the Income Tax Department is planning to take on additional commissioners in its international taxation division in order to increase scrutiny of multinational corporations operating in India, which the government suspects are evading large amounts of tax through transfer pricing arrangements.

According to a report from the Times of India, the Central Board of Taxation has already approved a request for six additional commissioners to augment the existing team of nine commissioners in the international tax department, as the number of multinational firms under scrutiny increased from 1,000 to 1,500 in the last financial year.

India's Income Tax Department has become very active in enforcing transfer pricing laws, issuing additional tax demands of more than R12 billion on foreign companies in the last financial year and reportedly recovering some R1 billion in unpaid tax. Companies targeted by the tax department have included Samsung, HLL, Sony, Bank of America, Coke, Microsoft, and Hero Honda.

The companies, however, don't agree. Samsung has said that there has been an incorrect interpretation of the transfer pricing law, and last year it appealed to the Commissioner of Income Tax, followed by HLL, Coke and Hero Honda.

The Finance Act 2001 introduced detailed Transfer Pricing Regulations in India as of 1st April 2001, to apply 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 assess association.

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