Further, on conclusion of MAP the tax payers have an
option whether to accept the decision of the CAs or
not and in the latter case they can follow the normal
appellate procedure in India.
Facts and Settlement
During the course of TP audits for financial year 2004‐05 (year ending 31st March 2005), a number of
Indian affiliates of US MNCs, which were engaged in
providing various
software, IT and BPO services were
subject to adverse TP adjustments. The Indian tax
authorities, adopting a different approach/criteria for
accepting/rejecting comparable companies,
determined arm’s length transfer price of such
service providers at a mark‐up of 25‐30 per cent on
total costs, as against 10‐15 per cent on total costs
determined/declared by the tax payers.
Some of the US MNCs invoked MAP
under Article 27 of the India‐US tax
treaty. These MAP applications have
resulted in discussions and
consultations between CAs of India
and USA to reach a settlement on
the above issue.
Pursuant to on‐going discussions, as
per media reports, the Indian and US
CA have apparently reached a
negotiated settlement whereby they
have agreed to mark‐up of 17.50 per
cent on total costs for software/IT
service providers for FY 2004‐05.
The settlement provides relief of around 10‐12 per
cent for those tax payers who have made
applications under MAP. It could also provide
correlative adjustment/corresponding deduction at
the US end thereby eliminating double taxation. At
the same time, the difference between 17.50 per
cent mark‐up and mark‐up declared by the tax payer
would continue to be liable to tax in India and will not
be exempt under any tax holiday provisions in India.
Conclusion and Comments
The above information is based on secondary sources
including media reports and there is no confirmation
from the CA of either country . Also, the formal MAP
order is not in public domain as yet. The factors and
principles that were considered by the CA are also
not known currently. While, the above settlement provides relief to tax
payers who have invoked MAP, it must be noted that
it is applicable only for the tax payers who have made
an application under MAP and that too only for the
year under consideration and would not apply to any
other year(s). Further, it would be applicable only to
the specific tax payer and may not carry persuasive
value as the detailed facts and basis are not available
in the public domain. However, this would be a useful
reference pointer to the approach of Indian tax
authorities and CA on similar matters in future. More
importantly, this MAP settlement may provide a
precursor of detailed safe harbor rules which are due
to be announced shortly.
The above settlement may also provide a sense of
succor to the Indian transfer pricing authorities at the
field level as they have recently faced a series of
setbacks in terms of reversal of their orders by the
appellate authorities. In some cases, the appellate
tribunal has upheld a mark‐up of 10‐12 per cent for
software/IT service providers while rejecting the add‐hoc
approach of the transfer pricing authorities. Such
tribunal orders would, in turn, encourage the tax payers
who had made applications under MAP not to accept the
MAP settlement and litigate under the domestic
appellate procedure.
However, tax payers following a lower mark‐up and who
are averse to litigation may wish to revisit their transfer
pricing policies and strategies in the light of the above
MAP settlement. |