Even as Swedish retailer Ikea awaits approval from the Cabinet Committee on Economic Affairs (CCEA) for its R10,500-crore investment plan over the next decade and plans to double its sourcing out of India, the company has been accused of understating its margins by as much as 85%. The transfer pricing adjustment demand sent to Ikea?s India operations pertains to FY09 when the Swedish firm?s purchases of essentially textiles from India were around R1,200 crore. While Ikea?s India operations have, says the taxman?s order, shown a profit of R23.7 crore, the actual profits were R133.4 crore more. Given the nature of the adjustment and the method of calculating this, more such orders are likely for later years. ?The Assessing Officer?, the order says, ?may examine the feasibility of initiating penalty proceedings u/s 271(1)(c) of the Act?.
Ikea?s current sourcing out of India is around R3,500 crore and it has announced plans to double this over the next few years.
According to Ikea, it has ?always paid taxes in accordance with local laws and regulations in all countries that (it) operates in? This incident will have no impact on the IKEA Group?s ongoing retail plans for India.?
According to the original tax department show cause notice, Ikea had shown a profit margin of just 0.065% on its purchases of R1,200 crore for FY09. The taxman argued that the margin was hugely understated. Ikea?s India operations, the taxman said, had developed considerable expertise in locating and developing local vendors and doing quality checks and other audits ? ?it is felt that you have not been compensated adequate?, the transfer-pricing adjustment order reads.
?In an independent, uncontrolled environment, any sourcing agent/supplier of goods who provides the services like you do will not be satiated with a net return of 0.065%?.
Later, Ikea said the profit margin it has showed on its India purchases was 1.99% and not 0.065%. Ikea did this by submitting returns of other comparable companies in order to establish what an arms? length value was for its services ? under transfer-pricing rules, arms? length pricing has to be used/established.
The IT department, however, rejected the comparisons offered by Ikea and said the likely arms? length transactions would result in Ikea?s profit for FY09 rising by Rs 133.4 crore.