'Govt needs adequate support from MNCs'

Traditionally, large transfer pricing adjustments by Indian revenue authorities have been a cause of concern for many MNCs operating in India, as well as those planning investments in the country. The recent announcement that the government has decided not to file special leave petition against the Mumbai High Court decision in the case of Vodafone India Services, which relates to the transfer pricing adjustments on account of share valuation, comes as a welcome relief.

On the other hand, government officials have made significant headway in bridging differences with their US counterparts with a view to resolving the current deadlock in the India-US mutual agreement procedure (MAP) and bilateral advanced pricing agreements (APAs) discussion that were held up for quite some time. The government is also expected to enter into bilateral APAs soon with various European nations including the UK and France. India's first bilateral APA was recently signed with Japan.

While the overall picture appears set to improve over time, the government and the tax administration would do well to address the concerns of the MNCs. Currently, there is a lack of guidance available to taxpayers on the approach likely to be followed by the revenue authorities in relation to transfer pricing evaluations of various complex transactions such as those involving location savings, valuation of intangibles, cost contribution arrangements and others. There is also a lack of consistency in the approach adopted by tax officers, who disregard the decisions of the higher appellate authorities. Revenue targets are given to transfer pricing teams which in itself defeats the purpose of the legislation that is to arrest tax avoidance.

The safe harbour margins prescribed for several industries including software, research and development, are also perceived to be very high, and call for rationalisation. India also does not have a well-developed mechanism of settlement of transfer pricing disputes with MNCs, unlike developed countries such as the US.

Needless to add, the government alone cannot do wonders unless there is adequate support from MNCs who may need to adopt a balanced strategy for their Indian operations after considering the peculiar features of the Indian market and its impact on their transfer prices.

Milind S Kothari
Managing partner, head - direct tax, BDO India LLP