Published Editorial

Go easy on transfer pricing norms

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DNA India


Chetan Rajput
Tax Partner

The dependence on foreign investments to sustain the growth story of India is undeniable and amid tussle from other investor-friendly jurisdictions, coupled with recent tax-related uncertainties, there is a compelling need to soothe the nerves of global investors and taxpayers at large. Against this backdrop, we have briefly discussed certain key industry expectations.

Retrospective amendments should not be used to blunt judicial decisions: The last few Budgets have seen a trend of incorporating “clarificatory amendments”, the latest being taxing indirect transfers. Such a move erodes investor sentiment considering India as an investment destination. Hence, any changes to tax laws having an adverse impact on taxpayers “should not be retrospective” in its application or clarificatory in nature.

Transfer pricing – requires transparency

Transfer pricing (TP) legislation has seen considerable controversies, uncertainty and lack of proficient dispute resolution mechanism. It’s imperative to boost confidence and faith of taxpayers/ investors and hence, the following suggestions:

a) In connection with international transactions:

Clarification that the TP provisions shall not be applicable to transactions not having any direct bearing on profits of the taxpayer;

Increase the variation range from a meagre 3% to at least 5% as applicable earlier;

Expedite introduction of safe harbour rules;

Valuation rules under different laws like direct tax, indirect tax and exchange control regulations should be synchronised to remove conflicts;

Introduction of rollback mechanism pursuant to Advance Pricing Agreement to clear backlog of earlier years in litigation;

Reliance on Mutual Agreement Procedure (MAP) settlements for future assessment years; and Introduce well-defined guidelines to compute economic adjustments like risk, working capital and capacity adjustments.

b) Domestic transfer pricing:

The provisions should be made applicable only to transactions that erode the tax base and also provide for correlative adjustments;

Threshold limit for complying with transfer pricing provisions to be increased substantially (at least up to `15 crore) from the existing limit of `5 crore;

Extension of Advance Pricing Agreement (APA) to domestic transfer pricing; and Directors’ remunerations should be excluded from the purview of domestic transfer pricing if it satisfies the threshold as per the Companies Act, 1956.

Incentive provisions to be revived and continued to foster foreign investment:

It’s suggested that the imposition of MAT on SEZ units may be withdrawn. The finance minister should reintroduce the Software Technology Parks (STP)-related tax holiday Sec 10A/ 10B of the Income Tax Act, granting income tax holiday to STP units (on lines similar to SEZs), including a 15-year tax holiday, exemption from DDT and MAT.

Simplification of assessment procedures:

The taxpayer should be allowed to make additional claims during the course of assessment proceedings to avoid hardships arising out of the Supreme Court decision in Goetze (India) Ltd (284 ITR 323).

Specific provisions should be inserted to allow the taxpayer to prefer appeal if the application for rectification is not disposed of for a period exceeding 6 months, in sync with the provisions incorporated in draft Direct Tax Code Bill, 2010.

In the case of large debatable and recurring assessments, the process of recovery of demand should be put in abeyance, and should allow for controversy to be settled at least at an high court level.

Other key recommendations:

Availability of treaty benefits – Should not be questioned if the non-resident is able to produce valid tax residency certificate.

Introduction of fiscal consolidation – Many developed countries have implemented ‘Fiscal Consolidation’ or ‘Group Taxation’ regime which allow group companies to be assessed to tax as one singular tax unit.

Revamp of constitution of Authority of Advance Ruling – Benches should be set up in metro cities for early disposal of the applications.

Increased threshold for scrutiny assessment – To make quality assessment and reduce the burden on taxpayers.

(Views expressed are personal)