Transfer-pricing cases under MAP take longer to resolve in India

OECD data shows higher timelines and heavier volumes than peer economies

Taxpayers — typically foreign companies — seeking to appeal excess tax demands through a key dispute resolution mechanism face longer timelines in India than in many peer economies.

   

Transfer pricing cases under the mutual agreement procedure (MAP) take an average of 35.8 months to close in India, according to the latest international data (2023) from the Organisation for Economic Co-operation and Development (OECD). Comparable timelines range from 19.3 months to 29.3 months in countries such as China, the US, Germany, South Africa, and Japan. India also handles a relatively high number of such cases.

   

Transfer pricing refers to the value assigned to goods or services exchanged between company units in different countries. Tax authorities scrutinise these transactions since multinationals can use them to reduce tax liability. The MAP provides an alternative dispute resolution mechanism independent of domestic remedies.

   

Proposed changes to transfer pricing rules in the Income-Tax Bill 2025 would have increased subjectivity and, according to experts, could have led to more disputes. The government withdrew that draft on August 8 and passed a revised version without the contentious provisions on Monday.

   

The OECD data covers only a portion of India’s transfer pricing cases. Still, tax experts say India is believed to have more such cases overall than many other economies. Changes in the new Income-Tax Bill 2025, if not revised, would have pulled more transactions under the transfer pricing lens.

   

For instance, third-party franchise agreements could have faced greater tax exposure under the proposed norms, said Kunj Vaidya, partner at PwC India, in a conversation before the Bill was revised.

   

Under the current law, two clauses determine whether a transaction qualifies as related-party and falls under transfer pricing rules. The withdrawn draft suggested that each criterion under both clauses would apply independently, broadening the definition of related parties.

   

For example, a hotel chain using an international brand could have been treated as a related party of the brand owner, even without participation in management, control, or capital. That would have triggered unintended compliance requirements and tax scrutiny, adding to the burden for taxpayers and the administration.

   

“Absent management, control, or ownership, these clauses should not have led to related-party compliance and scrutiny,” Vaidya said.

   

Had the provisions remained, the scope of transfer pricing would have widened, triggering extensive litigation. Even a company holding just 1 per cent of another’s share capital would have been classified as a related party (associated enterprise) under law, observed Fatema Hunaid, partner at Grant Thornton Bharat, in July.

   

India has historically recorded among the highest volumes of transfer pricing cases globally, Hunaid added, often several times more than countries such as the US, Canada, and Australia. By contrast, developed economies tend to see fewer but much larger and more complex cases.