1 July 2014 | Budget 2014 | Volume 4

Whilst Indian transfer pricing provisions are just over a decade old, the last couple of years have witnessed fast-paced developments in this field. On the one hand, the government has tightened its clutches by bringing even specified domestic transfer pricing provisions under the purview of transfer pricing. On the other hand, it is keen on simplifying the provisions by introducing the Safe Harbour rules. Efforts have also been made for granting certainty to taxpayers by enacting Advance Pricing Agreement (APA) provisions and ensuring that APAs are concluded in a short time span. The first set of around five APAs was concluded within the first year of introduction of the provisions, which is commendable as in most jurisdictions, the process takes 2–3 years.

SKP Transfer Pricing Wish List
  • Relax the existing safe harbour provisions for various transactions and also provide certainty on some definitions.
  • Provide clear guidelines for various transactions such as valuation of cross-border capital transactions, including subscriptions to capital, reorganisation, restructuring and share transfers.
  • Provide guidance on whether the debit/closing balance (year-end) of the Associated Enterprise (AE) is to be termed as 'debt' and is separately reportable under the amended provisions/extended definition of 'international transactions'.
  • Withdraw rights given to the Assessing Officer (AO) to appeal against the directions of the Dispute Resolution Panel (DRP) as it defeats the very purpose of the introduction of the DRP.
  • Provide clear guidance in terms of valuation methodologies to be adopted for valuing the guarantee transactions and whether credit rating analysis will be helpful for the purpose.
  • Advance Pricing Agreements (APAs)
    • Enhance the strength of the existing APA team. It will encourage more taxpayers to opt for APAs.
    • A roll-back mechanism for APAs would significantly help reduce current litigation and free up time of courts.
    • Extend the APA program to domestic transactions with a separate team of tax officers looking at such transactions.
    • Amend existing APA provisions to enable taxpayers to file bilateral APAs, especially in cases where Article 9/10(2) of the Double Taxation Avoidance Agreement (DTAA ) (dealing with AEs) providing for corresponding adjustment is absent.
  • Domestic Transfer Pricing
    • Transfer pricing provisions should not be applicable to domestic entities in a tax-neutral scenario.
    • Benchmarking of directors' remuneration is a challenge. Either such transactions should be outside the ambit of domestic transactions or more guidance should be provided.
  • The threshold of INR 10 million for maintaining mandatory documentation for international transactions with related parties should be increased.
  • 'Risk-based' approach should be adopted while selecting the case for transfer pricing assessment. Alternatively, the threshold for compulsory reference to the transfer pricing officer (TPO) by the AO should be increased from the existing INR 150 million.
  • Guidance for various adjustments such as working capital adjustment, capacity adjustment or any other risk adjustment is required.
  • Use of multiple-year data while benchmarking international transactions should be allowed.
  • Dedicated benches of the Income Tax Appellate Tribunal (ITAT) should be introduced/enhanced to adjudicate pending transfer pricing cases.
  • The DRP should have independent and full-time panel members to provide justice to cases.
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