Budget 2014: Key amendments in the Indian transfer pricing regulations
Tax Partner, EY
Associate Director-Tax & Regulatory Services
Since its introduction in 2001, the Indian transfer pricing regulations have gradually occupied the centre stage for tax litigation in India. This is evident from the fact that the number of cases in which adjustments have been made have increased by approximately five and a half times from 2001 to 2008 and the amount of additions have increased from approximately US$ 275 mn to approximately US$ 8,900 mn during the same period.
Considering the drastic increase in the tax disputes involving transfer pricing cases, the UPA government had laid the stepping stone in resolving these disputes by introducing the Advance Pricing Agreement (APA) regime and the Safe Harbour rules. With the success of the APA program, the NDA government has now taken the initiative of strengthening the tax administration of the APA program to increase the speed of concluding the agreements. Further, the budget has also introduced roll back provisions for the APA, wherein the tax payer and APA authorities can agree the same arm's length margin or the methodology for the past 4 years, as adopted under the APA for future years. This will surely support in reducing long pending tax litigations on transfer pricing in India.
With these new initiatives, the honourable finance minister (FM) has definitely brought some certainty in the tax environment.
The FM has also given due attention to the issues involved in transfer pricing disputes. The highly disputed definition of 'deemed international transaction' has now been amended to include transactions between resident entities within the definition of an international transaction if there exists a prior agreement or the terms of the transaction are determined between a unrelated resident entity and the offshore associated enterprise of the Indian entity. While this amendment should reduce the controversy on this aspect, at the same time it may be onerous for MNCs to monitor and report such arrangements.
The Range concept for determination of arm's length price had been long awaited and with the proposition to introduce the same, the business community should definitely expect some ease in proving that their transactions are at arm's length. Further, the use of multiple year data for determining the arm's length price had been a part of every transfer pricing dispute where the transactional net margin method had been used to benchmark a transaction. The amendment allowing the use of multiple year data should definitely provide a huge relief to taxpayers who find it difficult to benchmark the transaction using the most current year that is not available in public domain. However, it would be useful to see the wordings used in the Rules/Notification that introduce these provisions.
The FM has kept to his promise and brought a degree of certainty on some ambiguous matters. This should definitely assist in reducing transfer pricing litigation in India. However, a close watch will have to be kept on how these initiatives will be introduced.