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The finance ministry is likely to ease safe harbour norms to bring more taxpayers under its ambit as transfer pricing disputes between the tax department and multinational companies surge.
Safe harbour prescribes the limit and conditions within which the price of cross-border transactions with a related company declared by an assessee is not questioned by tax authorities.
The draft norms, released last month, had said companies earning a turnover of more than Rs 100 crore would not be covered by the rules. This ceiling might now be raised in the final rules to be released this month.
| I-T NOTICES IN 2012-13 |
|
Rs 1,090 cr |
tax to be paid by IBM
Rs 118 cr
tax to be paid by Gillette
Rs 1,300 cr
to be paid by Vodafone (adjustment)
Rs 1,063 cr
tax to be paid by Hindalco (adjustment)
Rs 5,135 cr
to be paid by Microsoft (adjustment)
Rs 15,000 cr
to be paid by Shell (adjustment)
“The limit would be changed because we are trying to include maximum number of taxpayers under the safe harbour rules,” said a finance ministry official who did not wish to be identified.
Besides, multinational companies in India, transfer pricing disputes have also been there with Indian companies having subsidiaries abroad. The income-tax department had sent transfer pricing notices to these companies for undervaluing transactions with their associates in 2012-13. These included Shell, Vodafone, Essar, Bharti Airtel, HSBC Securities & Capital Markets, Microsoft, Standard Chartered Securities and IBM, among others.
The industry had argued the limit was so low that only a few small players would benefit from it and many large taxpayers would not be covered. It had also made a case for lowering the minimum operating margins prescribed for safe harbour in the draft rules.
The tax department, however, might not provide much relaxation on this count, as it believes the numbers were derived after looking at some recent cases where taxpayers themselves had agreed to profit margins of 15 to 17 per cent in relation to their operating expenses and revenues. The industry feels if these margins are retained, safe harbour rules might not find many takers.
“The economic situation does not support these kinds of margins. No one is making that kind of profits in the current environment,” said Rahul Garg, leader-direct tax, PricewaterhouseCooper.
For instance, for the information technology (IT) sector, the draft rules had only said companies having operating margins of 20 per cent or more would be covered under the safe harbour norms. Those not adopting safe harbour norms can go for an advance pricing agreement or mutual agreement procedure.
The margins are in line with the recommendations of the Rangachary committee on safe harbour rules. For the IT sector, it had recommended a margin of 20 per cent for the first two years, which is a 33 per cent increase over the average margin of 15 per cent disclosed in assessment year 2008-09. The committee had not prescribed any turnover cap for safe harbour rules.
The safe harbour rules would apply to information technology, IT-enabled services, contract research & development in IT and pharmaceutical, financial transactions-outbound loans, financial transactions-corporate guarantees, and automobile ancillaries-original equipment manufacturers.
“We are finalising the rules and these would be sent to the law ministry for vetting after getting an approval from the finance minister. It might be notified this month,” said another official.
Of about 3,200 cases taken up for transfer pricing auditing in 2012-13, an adjustment of Rs 70,000 crore was made in 1,600 cases. In 2011-12, an adjustment of Rs 44,531 crore was made in 1,343 cases. This represented an increase of 57 per cent.
