CBDT directive calls for transfer price audits only when the revenue risk is high
In what could be major relief to multinational companies in India, the government has decided to considerably reduce the incidences of transfer pricing audits with regard to their cross-border transactions. The Central Board of Direct Taxes (CBDT) has directed its field officers to refrain from manual selection of transactions for scrutiny based on the threshold value, and instead restrict audit to cases only where the revenue risk to the government is huge. Also, an assessing officer will have to give a structured opportunity of hearing to the taxpayer before a case is referred to a transfer pricing officer.
The move comes after the revenue department’s FY15 transfer pricing audit said that income suppression by MNCs declined a steep 22% to Rs 47,000 crore compared with the previous year. This had bucked the trend of relentless surge in these estimates witnessed in the previous few years.
The Modi government has repeatedly promised a tax regime conducive to investors and is also believed to walk the talk. For instance, the Cabinet clarified in January this year that capital transactions won’t be deemed to yield income, in what obviated the government appealing against the Bombay High Court rulings in the Vodafone and Shell cases.
A new set of protocols issued by the CBDT now would replace an instruction issued by it in 2003 to field officers regarding manual selection of cross-border transactions for scrutiny. The new protocols, sources said, are designed to prevent avoidable litigation and to improve the quality of tax assessment work by choosing those transactions that have a revenue risk to the government for scrutiny and audit, instead of picking up every transaction above Rs 15 crore.
The new guidelines to field officers also restrict the number of important and complex cases to be handled by transfer pricing officers to 50 in a year. One reason that had led to steep rise in transfer pricing litigation was routine income adjustment, which officials were forced to make every fiscal.
Also, assessing officers have to first be sure that a transaction needs to be an international one for it to be referred to a transfer pricing officer to verify its valuation. Before making such a reference, he also has to get it vetted by a principal commissioner or a commissioner.
According to Amit Agarwal, partner (transfer pricing) at Nangia & Co, the new procedure for transfer pricing scrutiny would definitely go a long way in reducing litigation and is in line with principles of natural justice.
“These provide for a compulsory dialogue between the taxpayer and assessing officer before referring the matter to the transfer pricing officer. This is yet another move that would boost taxpayer confidence, as it now supersedes the long-standing instruction number 3, which was the last on this subject standing since 2003,” said Agarwal.