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Indian Transfer Pricing Ruling Fails To Simplify Matters

by Lorys Charalambous,, Cyprus

24 July 2007

A further Indian court ruling has done little to clarify or simplify the tangled taxation rules applying to the country's booming BPO sector. The Aztec ruling will probably extend the scope of transfer pricing rules, however.

The decision, the first transfer pricing dispute to be resolved by a Special Bench of a Tax Tribunal, establishes that transfer pricing 'arm’s length price’ (ALP) rules apply regardless of the tax status of a company. The Bench rejected Aztec Software's contention that transfer pricing rules should not apply because the company was enjoying a tax holiday (as an STP unit under Section 10A of the Income Tax Act), since there could be no question of tax avoidance.

Aztec Software, which provides services to a US parent, Aztec Software and Services, was one of a number of companies which had appealed against Revenue orders in 2006 asserting that companies engaged in providing IT services should have earned margins of 25-40% as compared to the 10% margins used by the companies in their ALP submissions.

Aztec's appeal was upheld by the Commissioner of Appeals in some respects, but continuing appeals from both parties had led the Income-Tax Appellate Tribunal set up the Special Bench.

The Bench also commented in detail on some of the technical aspects of the company's ALP submissions, but ended by referring the calculation of of the ALP back to the Assessing Officer without specific directions, something which is seen as unhelpful by many commentators.

Altogether, while the judgement establishes the wide applicability of the transfer pricing rules, it will further complicate the already messy process of establishing actual ALPs.

India's current transfer pricing rules apply to years from 2002/2003 onwards, and the battles currently taking place between companies and the Revenue, and in the courts, are still in respect of that first year of the new regime.

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