INDIA BUSINESS WORLD - JUNE 2006
THE MONTH THAT WAS...

TRANSFER PRICING SCRUTINY THRESHOLD ALL SET TO BE TRIPLED TO RS 15 CRORE

   MULTINATIONAL companies can breathe easy on the transfer pricing (TP) front. The finance ministry has decided to triple the threshold for compulsory scrutiny of such cross-border transactions to Rs 15 crore. Those who will benefit from the reduced compliance burden include IT and ITeS companies, pharma and auto majors, foreign banks and firms engaged in diamond trade.

Transfer pricing is the price charged by a group company from an associated enterprise for an international transaction relating to supply of goods, services and property. The law, which came into force in 2001, says that income accruing from such a transaction should be at arms' length price. The intention is to prevent shifting out of profits by manipulating prices charged or paid on a transaction.

MNCs have, so far, been audited by Indian tax authorities for their compliance with the arms' length principle for international transactions valued at over Rs 5 crore in aggregate. Till last fiscal, all cases where the total value of international transactions exceeded this limit were taken up for compulsory scrutiny.

The Central Board of Direct Taxes (CBDT), which has finalised norms for selection of cases for compulsory scrutiny of non-corporate assessees for 2006-07, has directed assessing officers to pick up all cases where the total value of international transactions (as defined in the TP regulation) exceeds Rs 15 crore. Cases where transfer pricing officers (TPO) have passed orders in the past year to make an adjustment or an addition to the total income of the tax payer will also be picked up for scrutiny.

Senior finance ministry officials said the new norms will apply to selection of cases for compulsory scrutiny of corporate assessees as well. Scrutiny is the process of selecting some income-tax returns and calling them for extra information to see if the details reflected therein are correct.

   “The decision to enhance the threshold limit will reduce the compliance and administrative costs for both tax payers and authorities. Indian revenue authorities can also consider introducing safe-harbour provisions for service providers, where a specified mark-up over their costs will be considered as being compliant with the arms' length principle. In Australia, for instance, cost plus 7.5% for services provided or availed of is considered to be in consonance with the arms' length principle,” according to Samir Gandhi of Deloitte Haskins and Sells.