New transfer pricing norms to reduce tax litigation

Govt is also in the process of formulating guidance with respect to specified domestic transactions within the group

In a bid to promote business-friendly taxation regime, the Centre has issued guidelines for transfer pricing (TP) provisions that are expected to reduce the rising volume of tax litigation.

According to the guidance note on international transactions issued by the Central Board of Direct Taxes (CBDT), one transfer pricing officer (TPO) will handle only up to 50 important and complex cases at a time, compared with 70 now. The move is expected to improve the quality of assessment and rationalise transfer pricing dispute cases that impair smooth operation of businesses in the country.

The government is also in the process of formulating guidance with respect to specified domestic transactions within the group. The guidelines will also be framed to determine the 'complex and important' cases.

Before making a reference to the TPO, the assessment officer (AO) will require to seek the approval of the principal commissioner or commissioner. The assessment officer must be satisfied there is an income or potential income arising from the case. Moreover, orders passed by the TPO will have to contain details of the data used and the reasons for arriving at a certain arm's length price (ALP) and the applicability of methods as they will be subject to judicial scrutiny.

Transfer pricing is the practice of computing arm's length price for transactions between group companies in different countries for determining profit and levying taxes.

The number of cases scrutinised has nearly quadrupled from 1,061 in 2005-06 to 4,290 in 2014-15. India has the highest TP litigation across the globe. "This does not augur too well for the Indian government, which is seriously looking at restoring the confidence of foreign investors and wooing them to invest in India," the latest Deloitte and Taxsutra report titled Transfer Pricing Dispute Trends suggests.

CBDT, the nodal body for tax policy, pointed out, "The application of method, including the application of the most appropriate method, the data used, factors governing the applicability of respective methods, computation of price under a given method will all be subject to judicial scrutiny. It is, therefore, necessary that the order of the TPO contains adequate reasons on all these counts."