India has the highest number of litigations over transfer pricing, where MNCs have been charged of reducing their tax liability by transferring profits to group companies abroad, a survey has found.
"India has the maximum transfer pricing litigations, almost two times that of the number two country," E&Y said in its Global Transfer Pricing Survey.
The country has over 1,500 cases pending under the transfer pricing, it said.
A large number companies are accused of selling goods and services to their subsidiaries at inflated prices under transfer pricing, to reduce profits and hence tax liabilities.
The law requires that goods and services should be sold to subsidiary companies at arm�s length price -- the price at which goods are traded between unconnected companies.
The survey included 877 multinationals from 25 countries.
"We are seeing increased audit activity and evidence of increased penalties, with a particularly marked increase in audits in emerging markets such as China and India," E&Y Transfer Pricing Global Accounts Leader John Hobster said.
Recently, Finance Minister Pranab Mukherjee said the government would upgrade transfer pricing norms to match the global standards.
The Directorate General of International Taxation had earlier constituted a committee to look into the issue of transfer pricing provisions.
"The committee will submit its report by March 2011," Mukherjee had said, adding that in the past 18 months the Directorate of Transfer Pricing has detected mis-pricing of Rs 33,784 crore.
Around 26% of the respondents surveyed said they have transfer pricing litigation in India, a more than three times increase from the 2007 survey.
It said the world's leading companies expect to devote far more resources to transfer pricing compliance -- 31% report an increase in internal headcount.
Besides, 62% noted an increase in the use of external consultants, and 23% report an increase in the use of software or similar tools.
"The trend is more evident in China, India and Unites States," the survey added.
