Japanese business chamber might take legal route on transfer pricing rules

Wants Indian tax authorities to recognise Indian arms of Japanese firms as service providers, not as traders

The Japan Chamber of Commerce and Industry in India (JCCII) is getting aggressive on the transfer pricing rules in this country.

It says if the issue isn’t resolved amicably with the Indian authorities, this could stop investments from Japan. It has not ruled out taking to legal options on the issue.

The Japanese government has asked Indian tax authorities to recognise the Indian subsidiaries of Japanese firms in line with their concept of 'sogo shosha', meaning general trading houses, for transfer pricing norms. It has raised the concern "very strongly" with the Prime Minister's Office (PMO), the department of economic affairs (DEA) and the department of industrial policy and promotion (DIPP), a key official said.

JCCII has complained that the Indian tax authorities have misunderstood the functional profile of the Indian subsidiaries of Japanese sogo shosha. "These entities are not traders but service providers, so transfer price taxation does not apply on them. If mutual discussions fail, then Japanese companies might go for litigation," an official from there told Business Standard on condition of anonymity.

The official also pointed to a lack of clarity in the measurement criteria. The chmaber has asked the revenue department to allow the Berry Ratio, a profit indicator and used globally, to be allowed for sogo shosha.

According to the official, the revenue department has stated that treatment of these subsidiaries of sogo shosha only as a service provider and not as trader has to be seen on a case-to-case basis, which Japan finds "highly arbitrary".

Rohan Phatarphekar, head of transfer pricing at KPMG, said Japanese trading companies typically provide marketing support activities, sometimes  akin to trading operations. "Traders operate at a much higher margin compared to the marketing executives," he said.

The issue was very strongly raised last week by Japanese minister of economy, trade and industry Toshimitsu Motegi, who was leading a high-powered business delegation comprising Suzuki, Mitsubishi, Hitachi and Panasonic, among others, to India.

During a meeting with commerce and industry minister Anand Sharma last month, the Japanese industry representatives showed extreme displeasure over transfer price taxation, which has put pressure on their margins.

Japan is the fourth largest contributor to foreign direct investment in India, after Mauritius, Singapore and the United Kingdom. It chipped in $14.8 billion between April 2000 and July 2013, about 7.4 per cent of all FDI inflows.