After mopping up over R33,000 crore from transfer pricing route in the last two years, the income tax department is now focussing on multinationals in pharma, shipping and diamond sectors, which transfer profits to parent or associate firms in low tax jurisdictions for reducing the tax liability in India.
The income tax department is studying these sectors as it believes that parent firms of these MNCs abroad?are not selling goods and services to subsidiary companies in India at the arm?s length price, but at an artificially set higher price. This allows the company incorporated here to depress its profits and evade tax. ?We have found instances in these sectors where companies are not following the arm?s length principle and so we are studying their transactions carefully,? a finance ministry official told FE.
Transfer pricing rules notified by the government are meant to deal with instances where MNCs present in India under-report profits in India. As per the rules, goods and services should be sold/bought by an Indian firm with a related party abroad at an arm?s length price ? the price at which the trading would have normally taken place between unrelated parties.
Taxing these units has become a complex area for the revenue department, with the government often disagreeing on the profits declared by a foreign company for its Indian unit. According to sources, such tax saving cases had increased rapidly in the last five years. ?The momentum to mop up revenue from transfer pricing would continue,? an official said. In the last two years, the government has prevented transfers of fund overseas through various dubious practices and detected R33,000 crore.
The revenue department has been focussing on intangibles such as marketing intangibles, supply chain intangibles, research and development intangibles and patents intangibles, among others, while scrutinising revenue losses.
According to Deloitte tax partner Samir Gandhi, ?Transfer pricing issues are one of the hot issues on every major tax jurisdictions and a growing economy like India is not an exception to that rule,?
He, however, said, one can consider how best to prevent and resolve transfer pricing disputes – whether its in case of IT ITES sector, pharma industry or dispute on payment of inbound intangibles or management charges.
An Ernst and Young survey conducted last year pointed out that India has the highest number of litigations over transfer pricing, almost two times that of the number two country, where MNCs have been charged of reducing their tax liability by transferring profits to group companies abroad.
In the proposed Direct Taxes Code, which is to be implemented from next fiscal, there is a provision for advance pricing agreement (APA) to bring certainty and stability in the taxation of cross-border transactions.
Besides, dispute resolution panel (DRP) was introduced last yeat for disputes relating to transfer pricing.
?The above measures (APA) can reduce complaince and administrative burden for both tax payers and tax authorities and bring certainty to complex issues of transfer pricing? Gandhi added.