The government has done well to rein in the taxman to ensure that transfer-pricing (TP) additions fall in the last two audit rounds; from the peak of R70,000 crore in FY13, these have fallen to R60,000 crore in FY14, and then to R47,000 crore in FY15, as FE reported last week. Apart from the harassment to taxpayers, as the taxman found in the case of Vodafone and Shell when the Bombay High Court struck them down, the cases were not even standing up to judicial scrutiny—which is why the government did well to not pursue these in the Supreme Court. Since MNC firms have borne the brunt of the additions, this will be of some relief. It would, however, be premature to celebrate for a variety of reasons. For one, there is a big backlog of such cases. Since FY06, a total of R2.64 lakh crore of transfer-pricing adjustments have been made to the incomes of companies—around a third of this will have to be paid back as taxes even assuming no penalties and interest rate payments. The companies involved run into thousands. In just the last round of transfer-pricing cases, a total of 4,300 companies were involved, 3,600 were involved in the year before that. Most income additions are on IT and IT-enabled services companies and, in the case of FMCG and electronic goods companies, the adjustments pertain to their advertising, marketing and promotional expenses. In a case involving Maruti Suzuki Limited, the transfer-pricing authorities said its marketing expenses were too high and added these back to its income for the year—by way of comparison, the IT department picked up Hindustan Motors (which hardly sells cars any more) and Tata Motors which, as primarily a truck manufacturer, needs to advertise less.
This is what the finance minister needs to fix, to not just temper the irrational adjustments being made—R18,000 crore in the Shell case the Bombay High Court struck down—but to find a solution to the existing cases. In the past, the tax department had come out with margins as part of its Advance Pricing Agreements (APAs), but these have been rejected by industry as being too high—the tax discussions with the US under the mutual agreement procedure (MAP) are also stuck on the issue of the margins. Once reasonable profit margins are agreed to, the norms for roll-back need to be notified—in the case of IT companies, while the US wants the taxman to accept global profit margins of 12-13%, the government is insisting on 20-30% norms. It is likely the norms will be notified soon—once this is done, previous transfer pricing cases can be settled using these norms. The important thing is for the norms to be reasonable ones.