Transfer pricing legislation likely in a month

Our Economic Bureau

New Delhi, June 14: Following the introduction of regulatory measures for transfer pricing in this year’s Budget in order to boost tax collection, the government is now planning to put in place a comprehensive transfer pricing legislation within a month on the lines of regulations followed in the Organisation for Economic Co-operation and Development (OECD) countries.

Experts from OECD would visit India next week to discuss the issue with the Indian government, joint secretary (transfer pricing) GC Srivastava told presspersons at a seminar on transfer pricing organised by Ernst & Young. The transfer pricing rules, intended to improve the margins of Indian corporates and to increase tax collections, has allowed flexible options for pricing international transactions, but mandated stringent disclosure norms, including ownership pattern, financial forecasts, risk assumed and assets utilised by the companies.

Ernst & Young CEO John Hobster, feels that the penalty structure in India was harsh and could lead to lower foreign investment.

Mr Srivastava, however, disagrees. “India’s penalties are the lowest in the world and there is no scope for complaints.”

Speaking to reporters Mr Hobster said that India’s draft regulation did not come as a package deal, which is ideally a balance between an aggressive framework including penalties and space for open negotiations with the government in advance. Mr Hobster added that things might improve as the Indian government had given indications that it might incorporate provisions like advance pricing agreement (APA) soon.

Mr Srivastava confirmed that the government was considering the option of including APA in the regulations. Corporates resort to transfer pricing through various ways, including research and development expenses, head-office expenses, management services expenses, under-valuation of exports and over-valuation of imports, etc.

The Central Board of Direct Taxes (CBDT) has suggested that “arms length price” in relation to an international transaction could be determined through any five methods as stipulated by the OECD — comparable uncontrolled price method, resale price method, cost-plus method, profit split method and transactional net margin method.

The draft regulation said that international transactions would be comparable with respect to the risk assumed by the respective parties, conditions prevailing in respective markets, including geographical location, size of the market, cost of labour and capital and overall economic development and level of
competition.