Thus, even though both CV and TP regulations aim to achieve “arm’s length” or “fair value” status in related party transactions, ensuring that such pricing has not been influenced by the relationship between parties, it is this divergence of objectives of the two regulations that poses a major challenge for taxpayers.
The issue of CV and TP divergence is not just relevant for India, but also for other developed and developing countries due to the nature of the problem. The major concern is that two branches of a nation’s revenue authorities apply different rules and principles for the same transaction. Without coordinated efforts, this at times leads to double taxation, and has the potential to prove detrimental to the investment climate.
In India, the Special Valuation Branch (SVB) of the Customs and the Income Tax authorities responsible for administering TP have recently been making efforts to use each other's documentation to check for any prima facie inconsistencies. SVB often seeks TP documentation as part of their CV exercise, and more recently, they have been insisting upon obtaining any TP-related advance pricing agreement (APA), as a standard requirement in the checklist of information required for the CV review of inter-company imports.
Similarly, transfer pricing officers (TPOs) in some cases have reviewed the position adopted by taxpayers in the documentation submitted to SVB for CV purposes, while framing assessments under Indian TP regulations. There have been a few examples where CV and TP have been reviewed simultaneously, and a common valuation method has been accepted for both TP and CV. An APA has also been recently concluded by the Income Tax authorities wherein the CV was accepted as an arm's length price for certain related party imports.
It is burdensome for taxpayers to comply with two different sets of rules for valuation of the same transaction due to two different regulations with conflicting objectives. An attempt to seek convergence of CV and TP requires a close look at the relevant methods of valuation under the two regulations. The CV and TP methods used in the Indian context can be somewhat reconciled with several similarities and some differences.
Historically, TPOs have been prone to reject taxpayers’ reliance on the CV approach or SVB acceptance of certain import prices, citing separate legislative requirements under Customs and Income Tax regulations. In their judgment, the onus cast upon the taxpayer was discharged only when it did what was mandated using separate CV and TP approaches. TPOs argued that merely because another arm of the government — SVB/ Customs — considered an import price to be at arm’s length, was not reason enough for the taxpayer to be relieved of its duty of proving the arm’s length price based also on methods prescribed under TP regulations. Income Tax Appellate Tribunals have also upheld the need for separate arm’s length justifications for TP and CV purposes.
This phenomenon is not unique to India. The US Customs and Border Protection (CBP) has published a document on the relevance of APAs and TP documentation in establishing the CV of imported goods.
Given that TP and Customs regulations operate with conflicting objectives, convergence of pricing and demonstrating that it is at arm’s length is difficult to achieve. There is a need to evolve a mechanism wherein both the Income Tax and Customs authorities can be brought together on a common forum to determine one arm’s length price. Internationally too, at various forums, it has been suggested that governments should help foster more co-operation between customs and income taxauthorities.
Ideally, a mechanism should be put in place to facilitate joint price setting from both TP and CV perspectives through greater co-ordination and exchange of information between customs and TP authorities. However, such an exercise may not be effective if carried out unilaterally by any country. This can be undertaken on a wider international platform, similar to the recent example of the base erosion and profit shifting (BEPS) project and the resulting action plans at the OECD.
A practical way forward for taxpayers is to undertake their import price evaluation in a manner in which there is consistency in the CV and TP approach, by undertaking one consolidated analysis that simultaneously complies with methods prescribed in law for CV and with those prescribed for TP. Seeking both CV confirmation through the SVB process and TP confirmation through an APA process, based on such consolidated documentation, may bring about the desired outcome of certainty under the two regulations for taxpayers.
Gajaria is Partner and Head of Tax, KPMG in India, and Pardasani is a Chartered Accountant. The views expressed are personal
