SKP Budget Primer
17 February 2015 | Budget 2015 | Volume 3

SKP Transfer Pricing Wish List
Transfer pricing has been at the core of tax litigation in India in the past few years. All of the cases that have made headlines in Indian taxation news, have involved transfer pricing issues. The new government showed its resolve to reduce litigation on transfer pricing and provide certainty on the same by bringing in significant amendments in the last Budget. Additionally, while the statements from the Prime Minister and Finance Minister promise a more tax adversarial regime, we expect that the transfer pricing regulations are fine tuned and that clarity and guidance on certain aspects are provided. Our expectations from the Budget 2015-16 are as follows:

A. Detailed rules and guidance to taxpayers
  • Provide rules and practical guidance on the use of multiple-year data and range concept, which were already introduced in the previous Budget.
  • Notify detailed rules regarding roll back applicability for Advance Pricing Agreements (APAs). These provisions were introduced through the Budget 2014-15, however rules are still awaited.
  • Provide clear guidance in terms of valuation methodologies to be adopted for arriving at the arm's length price for financial transactions such as loans and guarantees.
  • For valuation of intangibles, prescribe detailed valuation norms and methodologies on an income-based approach or a discounted cash flow method.
  • Provide guidance for benchmarking transactions of royalty and management fees along with specifications of the documentation to be maintained for supporting it.
  • Provide proper guidance along with examples for computation of various economic adjustments such as working capital adjustment, risk adjustment, capacity adjustment, etc.
  • Provide guidance on transfer pricing implications relating to the issue of marketing intangibles or Advertisement, Marketing and Promotion (AMP) expenses, specially guidance with respect to what constitutes AMP expenses, what is considered as brand development, selection of comparables and application of the Bright Line Test. Also, an industry-wise safe harbour for advertisement, marketing and sales promotion expenses would be of much help.
B. Legal amendments to rationalise the transfer pricing provisions
  • Transfer pricing provisions should not be applicable to share issue and other similar transactions (where there is no income arising) in line with the Bombay High Court's decision in the case of Vodafone Services India Pvt Ltd. Though the government has issued a press release accepting the Bombay High Court's judgement, a clear amendment in the law will go a long way in restoring investor confidence and reducing litigation.
  • The threshold of INR 10 million for maintaining mandatory documentation for international transactions with associated enterprises should be increased to INR 50 million.
  • Recognise by way of amendment, that the regulations of business strategies and business considerations should be given prime importance while deciding whether a transaction is at arm's length or not. Guidance should be taken from the OECD Guidelines in this respect.
  • Converge and align the Customs and Transfer Pricing Regulations, specially the methodologies applied for determining the arm's length price/fair market value of import payments made to overseas group companies by their Indian counterparts.
Domestic Transfer Pricing
  • Increase the existing threshold of INR 50 million to INR 500 million for making the transfer pricing provisions applicable to the specified domestic transactions.
  • Transaction of directors' remuneration should be removed from the purview of domestic transfer pricing or at least non-shareholder directors' remuneration should not be subject to transfer pricing.
  • Domestic transfer pricing provisions should not be applicable to domestic entities in a tax-neutral scenario i.e. in cases where taxes have been paid at maximum marginal rate by either of the related parties.
  • Extend the APA program to specified domestic transactions, at least for high value transactions.
Safe harbour provisions - bringing in rationality
  • The current operating margins expected from the transactions covered under safe harbour are on the higher side, the government should relax the mark-up percentages.
  • Extend the safe harbour regulations to include services such as investment advisory services, marketing support services, and captive R&D services other than R&D in IT.
  • Provide relaxation in maintenance of documentation for taxpayers fully covered and opting for safe harbour as it leads to an unnecessary compliance burden and increases costs.
C. Tax administrative aspects
  • Dedicated benches of the Income Tax Appellate Tribunal (ITAT) should be introduced/enhanced to adjudicate pending transfer pricing cases. Steps should be taken to address the huge back-log of transfer pricing cases.
  • Allow the due cognisance of international guidance wherever the Indian regulations are silent or do not provide the necessary guidance on particular transfer pricing issues.
  • Withdraw rights given to the Assessing Officer (AO) to appeal against the directions of the Dispute Resolution Panel (DRP) as it defeats the purpose of the introduction of the DRP. Similarly, the rights of revision provided to the Commissioner under Section 263 should be curtailed in cases of directions issued by DRP.
  • Steps should be taken to strengthen the administrative mechanism of APAs to deal with the overwhelming response from taxpayers and concluding APAs promptly.
  • Enable taxpayers to file bilateral APAs, in the absence of a clause for the provision of a corresponding adjustment in tax treaties.
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