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Govt likely to soften rules on transfer pricing by September

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SummaryIn what would spell huge relief for sectors including IT, ITeS, and auto component makers, the finance ministry today said that transfer pricing norms for certain sectors, would be eased to bring down litigation between the department and foreign companies.

In what would spell huge relief for sectors including IT, ITeS, and auto component makers, the finance ministry today said that transfer pricing norms for certain sectors, would be eased to bring down litigation between the department and foreign companies.

Revenue secretary Sumit Bose announced the draft safe harbour rules that would, subject to certain conditions, provide exemption to the Indian subsidiaries of multi-national companies, from detailed scrutiny of transactions between them.

The rules would include sectors like IT, ITeS, contract R&D in the IT and pharmaceutical, outbound loans, corporate guarantees and auto ancillaries like original equipment manufacturers. These sectors would be exempt from transfer-pricing audit, the mechanism through which profit is allocated between the subsidiary and the parent company.

The department has sought comments from industry till August 26 after which the rules would be finalised, likely by early September, Bose said adding the rules will be applicable for financial years 2012-13 and 2013-14. According to the draft, if a software company engaged in development services other than contract R&D, having the total value of international transaction of not more than Rs 100 crore, has operating profit margin of 20 per cent or more, tax officials will not question the income arising out of such a unit.

Similarly, for contract R&D in the IT sector where the total value of international transaction does not exceed Rs 100 crore, if the profit margin is more than 20 per, the transaction would not attract tax officialsí scrutiny. Welcoming the move, tax experts said that the rules would help in reducing transfer pricing litigation.

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