Our tax laws are increasingly perceived as fraught with uncertainty in international circles. The recently concluded transfer pricing audit for the assessment year 2006-07 reaffirms this notion. Until last year, the transfer pricing controversy concerned the use of contemporaneous single-year data and high margin expectations from captive software and back-office service providers. But this round of audit has brought many other issues to the fore.
A shortfall in tax collections over the past few months and pressure on Indian tax authorities to increase revenues could have led to a focus on high-yield tax issues such as transfer pricing. Current estimates suggest that adjustments on account of transfer pricing have almost doubled since the last assessment.
In the present scenario, the introduction of the dispute resolution panel (DRP) is a welcome step. This alternate remedy is available to all ?eligible? taxpayers?foreign companies or taxpayers for whom tax adjustment has been proposed on account of transfer pricing matters. Detailed rules, formed in this regard by the Central Board of Direct Taxes, were released on November 20, 2009, and provide further guidelines on appeal filing procedures. They also empower the Board to constitute panels headquartered in eight locations including Delhi and Mumbai. Each panel will consist of three commissioners of income tax. The formation of a panel to preside over the issue is likely to standardise the approach within a particular jurisdiction and reduce judgemental errors. Most importantly, the present DRP provisions will bring an end to prolonged litigation.
Another significant step taken by the government in this regard has been the introduction of safe harbour provisions, which have been introduced in many countries. In India, this is in the context of circumstances under which income tax authorities accept the transaction price declared by the taxpayer. Safe harbour rules and the alternate dispute resolution mechanism introduced in the last budget are expected to provide much-needed guidance and relief to taxpayers.
The author is tax partner, Ernst & Young. Views are personal