Interpreting ‘Transfer Pricing’ rules in India

Ozg Transfer Pricing Consultant

Ozg Center | London | New Delhi | New York | Mumbai

Back Office Phone # 0091-9811415861-72-84-92-94


The issue of transfer pricing has hit headlines in recent times with a rising number of disputes involving frontline domestic and international companies. For a perspective on this issue, Motilal Oswal organized a concall with two luminaries in the area of transfer pricing and international taxations, Mr Mukesh Butani and Mr Amod Khare, from BMR Advisors. They present the key takeaways.

Indian Transfer Pricing laws based on OECD guidelines; Belt tightened elsewhere too

– Indian transfer pricing (TP) laws are based on OECD guidelines which too are evolving.

– Seen simply, transfer pricing laws prevent shifting profits from high tax jurisdiction to a lower one.

– Indian TP laws are operational since 2001 that defines its applicability.

– While a host of TP issues has affected companies and investors, belt tightening on TP laws in recent years is a worldwide phenomenon.

Devil is in the detail – specifics of India

– Indian laws have detailed guidelines to determine the Arm’s Length Price (ALP) based on five methods.

– However, normally it is the Transactional Net Margin that is most widely used. It involves comparison of the margin earned by the tax payer vis-à-vis the net margin earned by comparable companies under similar circumstances.

– The laws also prescribe procedures for the tax payer and tax department to compute tax liability and demand, respectively.

–  A detailed process of remedy for tax payers with various layers of appeal is also possible under the law.

Disputes due to interpretation of economics, laws, implementation

– As TP becomes important as a source of revenue, there are increased disputes.

– In most cases it is the differing perspectives on the economic basis of transactions that result in disputes.

– Thus, the choice of comparables to determine the Arm’s Length Price (ALP) becomes the key issue to the dispute.

– Lagged enactment of the law and proactive tax officials have increased the incidence of disputes.

– This has resulted in a pile-up of disputed cases.

Way forward – APA mechanism holds promise

– The Advance Pricing Agreement holds the promise of a true game changer. This is an agreement that the tax payer enters with the Advanced Pricing Authority and it broadly ensures that the transfer prices worked out are not questioned again by the tax administration.

– The 2012 changes in the Dispute Resolution Panel (DRP) rules, that makes it more even by allowing appeal by the tax department too, hold the promise of faster and more balanced orders (earlier only the tax payer was allowed to appeal thus making DRP biased towards the tax department).

– Besides, tax payers need to be cautious and maintain a checklist.

– As a specific example, the Vodafone issue is likely to be settled with some compromise. Incidentally, the Finance Minister in his post policy media interactions highlighted that the offer of conciliation from Vodafone is under Cabinet’s consideration.

Transfer Pricing

The Indian government is aggressively pursuing the tax revenue it believes it is entitled to from foreign multinational corporations with facilities in India. The efforts are focused on the transfer pricing that companies use as products are moved from one location to another. Multinational firms minimize tax liabilities by moving taxable income from higher taxing jurisdictions to lower ones. The Indian government believes it should be able to tax the higher prices as they generate income as the product moves internally within a company.

India currently has over 1500 transfer tax disputes, which some believe will hurt the countries appeal for foreign investment. Currently British mobile phone company Vodafone is fighting a $1.6 billion transfer pricing case in the Bombay High Court. The largest transfer pricing case involves the Anglo-Dutch oil major Royal Dutch Shell, which is being asked for the tax on a $2.8 billion transfer price variance when shares were issued at 10 rupees each but that tax authorities valued them at 183 rupees each.

14 Mar, 2013 / logistics

Ozg Transfer Pricing Consultant

Ozg Center | London | New Delhi | New York | Mumbai

Back Office Phone # 0091-9811415861-72-84-92-94



Comments are closed.