Multinational companies might demur, but the taxman won?t relent. Continuing with its aggressive stance on transfer pricing adjustments pertaining to cross-border transactions of MNCs operating in India with related parties abroad, the income tax department has attributed an additional taxable income of over R70,000 crore on this front to the MNC arms in the country in the 2012-13 audit.

The adjustments sought are 58% more than such claims of R44,500 crore made in the 2011-12 audit, itself a whopping 85% higher than the previous audit. There is usually a lag of three years between the audit and the year of assessment. So, the 2012-13 audit is related to assessment year 2009-10.

Transfer price is the price at which the Indian arm of an MNC trades goods and services with related parties abroad. Since there is scope for firms shipping profits to a low-tax country ? by underpricing goods, services, shares and other intangibles sold to a foreign entity or overpricing purchases by the Indian firm or showing what taxman would reckon as income as expenditure ? the tax department verifies them and often asks for adjustments.

A senior finance ministry official told FE that adjustments had been made in about half of the cases picked up by the income tax department?s transfer pricing office. He added that major cases picked up this year included Shell India and Vodafone, making up the major part of additions. Shell alone accounted for R15,000 crore addition in its income on account of intra-group share transfer. Hindalco is another case where financial transactions ? corporate guarantee in this case ? have been targeted for making adjustments. While questions have been raised on the transfer pricing order pertaining to Shell, orders on Microsoft and Maruti, in which R&D investments in India ? have been questioned by the department, are being seen as a potential dampener for the R&D investment done by the MNCs in the country.

Having drawn flak regarding its transfer pricing adjustments, the department is streamlining the process adopted by the transfer pricing officers (TPOs) for making additions to income. The official said that whatever a TPO says in a particular order needs to have solid backing. The department will soon come out with guidelines for TP adjustments in case of financial transactions including share transfers and corporate guarantees.

The guidelines will prescribe methods to be used for TP adjustments and are expected to include the discounted cash flow (DCF) method used in the Shell case and yield approach among others.

The yield approach for pricing guarantee fees is one whereby the arm?s length compensation for a guarantee is based on the interest savings to the borrower arising from the guarantee.

This is significant as finance ministry had earlier asked the law ministry for its view on transfer pricing cases in the backdrop of Shell and other cases, which are seen as impacting investor sentiment. The law ministry?s view on the matter supported the approach adopted in the TP orders.

The methods to be used for transfer pricing adjustments have been prescribed in Section 92C of the Income tax Act which says: The arm?s length price in relation to an international transaction will be determined by comparable uncontrolled price method; resale price method; cost plus method; profit split method; transactional net margin method or any other method prescribed by the Central Board of Direct Taxes (CBDT).

The official said that as CBDT can prescribe any method it feels should be followed for a particular type of transaction, it is providing TPOs, through the guidelines, options they can use in their orders.