Indian tax authorities have the infamous distinction of being unduly revenue biased. The troubles for the taxpayer are compounded when the subject (transfer pricing) is new in India and the tax authorities are also on the learning curve. However, the emphasis on training the field officers handling transfer pricing cases has been increasing over the years. Even the time available to the officers handling cases involving transfer pricing matters has been increased– the due date for completion of cases involving transfer pricing provisions is 45 months, as against 33 months in other cases. This clearly demonstrates the importance attached to transfer pricing cases by the Indian authorities. In fact, this has also stared bearing fruit for the authorities – it is understood that almost one – fourth of all cases selected for a transfer pricing audit have resulted in an upward adjustment by the authorities. Also, it is estimated that the amount of adjustment in these cases in the first three years of transfer pricing audits has been to the tune of around USD 1,735 million!

In these turbulent times, the best option available for a taxpayer is to keep in mind the approach generally followed by the transfer pricing authorities. Following is a summary of some of our experiences of dealing with the authorities in this season of transfer pricing audits:

• Centralized database searches are being done for many industries and used across all offices in India. Notable examples are software (21% on costs), ITES (24% on costs), marketing services (33% on costs), investment advisory services (38% on costs) etc
• Secret comparables are used whenever they are in favor of tax authorities. Notable examples
  are gems and jewellery, shipping, cosmetics industry etc.
• Adjustments on account of differences in risk, working capital cycle etc. are being denied.
• Notional interest is being charged in case of delayed receipts from group companies. In fact, LIBOR used as benchmark rate in case of banking companies who have parked their funds with the overseas group companies, even for short term.
• Foreign databases are not accepted since the authorities do not have access to these databases in India
• Adjustments made in certain cases where adequate documentation not produced by taxpayer. Notable examples are payments of royalties, management fees, secondment cross-charges etc.
• Notional Guarantee Fees is being charged in cases where guarantees / letters of comfort etc. are being issued to lenders of overseas group companies.
• Business reasons for losses, like downturn, start-up, idle resources etc., are being ignored.
• Notional charge for “marketing intangible” for overseas parent / group company in respect of marketing services rendered by Indian marketing arm.
• As a starting point, every taxpayer must have a robust transfer pricing file containing the transfer pricing policy and related functional analysis, economic characterization and other related factors duly documented, including supporting documents from external sources; and the same should also be explained appropriately to the transfer pricing officer.

For any further information on transfer pricing, please write to info@skpgroup.com