New transfer pricing rules tell taxman to be careful
Though not as high profile as the Vodafone or Cairn retrospective tax demands, the biggest threat to MNCs operating out of India is the sharp jump in ‘transfer pricing’ adjustments to their income – of the Rs 2.6 lakh crore of such adjustments made since FY06, Rs 1.7 lakh crore were made in just FY12-14. While the Bombay High Court struck down Rs 23,000 crore worth of such adjustments to the incomes of Shell and Vodafone last November, the Microsoft case where the taxman added Rs 5,135 crore to its income for FY06-09 on grounds its R&D centre in India created a lot more value than was being declared continues to hang fire, as do most others. As FE reported on Sunday, the Central Board of Direct Taxes (CBDT) has issued a new set of rules ensuring such transfer pricing adjustments are only made with the greatest of care, and after consulting with very senior tax officials.
Under the prevalent scheme of things, an assessing officer (AO) can refer any MNC case to a transfer pricing officer (TPO) in case s/he thinks the transactions need to be looked at more closely – and the higher the value of the transaction, the greater the chances of it being referred to a TPO. As per the orders issued last Friday, this practice is to be stopped. As long as the assessee firm has declared its international transactions ‘no detailed enquiries are needed at this stage’, the order says while going on to add ‘and the AO should not embark upon scrutinising the correctness or otherwise of the price of the international transaction at this stage’. Also, before an AO is to refer a case to a TPO, the approval of the Principal Commissioner or the Commissioner has to be got. None of this is to say MNCs will be allowed to under-report their incomes to evade taxes, but as the order says, ‘transfer pricing cases are now being selected for scrutiny on the basis of risk parameters’ anyway, so why add an intermediate layer? Also, with the CBDT working on 400 applications on Advance Pricing Agreements (APAs) that deal with how various type of transactions are to be valued – one bilateral and 13 unilateral APAs have been signed already – there is already a framework on how valuations are to be done. It also helps that once the BEPS provisions are ratified by all countries, the reporting of transactions – and the value addition from them – also becomes more stringent anyway. And if the case does go to the TPO, that official has also been asked to be more careful and get approvals from his/her bosses, apart from ensuring the case is really strong since ‘computation of price under a given method will all be subjected to judicial scrutiny, it is, therefore, necessary that the order of the TPO contains adequate reasons on all these counts’. Given how often the taxman is losing cases, and high profile ones like Vodafone and Shell, it is not surprising the taxman is being advised greater caution – on average, the taxman wins just 12% of cases in the Supreme Court and about a fifth in the tribunals and high courts.