It is a well known fact that transfer pricing (TP) provisions have fuelled unprecedented litigation in India.
TP provisions were introduced in India by the Finance Act, 2001, so as to protect India's right to collect a fair share of tax in respect of cross-border transactions. In simpler terms, TP provisions were introduced to ensure that an international transaction between two associated enterprises is made at arm's length price (ALP) so that both the countries involved get a proper share of tax revenue in their respective jurisdiction.
It should be appreciated that India is a developing country with a lot of constraints. The international transactions in India are susceptible to international economic pressure. The profit margin in India does not often compare favourably with international margins. Therefore, the transfer pricing provisions in India have to take into consideration the economic realities prevailing in the country. However, the revenue authorities generally take a view which is against the tax payers. This results in litigation in thousands of cases. Going by the figures of fiscal 2011-12, TP additions were made in 1,338 cases creating an additional tax demand of Rs 44,500 crore.
The aforesaid position and the difficulties of the tax payers have also been fully recognised by the government. The memorandum explaining the Finance Bill 2009 specifically took note of the difficulties faced by the assessees as under:
"Section 92C of the Income-tax Act provides for adjustment in the transfer price of an international transaction with an associated enterprise if the transfer price is not equal to the arm's length price. As a result, a large number of such transactions are being subjected to adjustment giving rise to considerable dispute."
Determination of arm's length price (ALP) in an international transaction is a specialist's job. Therefore, section 92CA provides that where the assessing officer considers it necessary or expedient so to do, he may refer the computation of ALP in relation to an international transaction to the transfer pricing officer (TPO).
In the initial years of implementation of TP provisions and pending development of adequate data base for determining ALP, the Central Board of Direct Taxes (CBDT) rightly decided that it would be appropriate if a small number of cases are selected for scrutiny of transfer price. The CBDT, therefore, decided that only where the aggregate value of international transaction exceeds Rs 5 crore, the case should be picked up for scrutiny and reference be made to the TPO.
It was, however, soon realised by the government that the limit of Rs 5 crore for making reference to TPO is hardly adequate. Therefore, in a welcome move, the CBDT vide instruction no. 10/2013 dated August 5, 2013, have further relaxed the monetary limit for selection of TP cases for compulsory scrutiny. Under the new instructions, the following categories of cases/returns shall be compulsorily scrutinised:
- Cases where value of international transaction as defined u/s 92B of Income-tax Act exceeds Rs 15 crore.
- Cases involving addition in an earlier assessment year on the issue of TP in excess of Rs 10 crore which is confirmed in appeal or is pending before an appellate authority.
It may be clarified here that the limit of Rs 15 crore for selection of TP cases for scrutiny was prevailing earlier also. But the said limit was only by way of internal instructions.
The above relaxation made by the government will certainly help a large number of tax payers who are involved in international transactions. In this context CBDT is also requested to find an appropriate mechanism so as to reduce the element of time in settling TP disputes. It will be recalled that creation of Dispute Resolution Panel (DRP) for expeditious disposal of TP cases has not fulfilled its objective.
Whenever a reference is made by an assessing officer (AO) to a transfer pricing officer (TPO), AO gets an additional time of 12 months to complete a 'draft' assessment order. Then upon reference to DRP, a further time of nine months is allowed to DRP and one month to AO to complete assessment. Thus the assessment procedure takes around 22 extra months. For example, the assessment for AY 2010-11 should be made latest by March 2013. But if reference is made to TPO, draft assessment order will be allowed to be completed by March, 2014 and final assessment order (after DRP order) by January, 2015. A large number of foreign companies were tempted to opt for DRP route rather than routine CIT(A) route because of the declaration made by the finance minister in his budget speech that: "the dispute resolution mechanism presently in place is time consuming and finality in high demand cases is attained only after a long drawn litigation till the Supreme Court. Flow of foreign investment is extremely sensitive to a prolonged uncertainty in tax-related matter. Therefore, it is proposed to amend the Income-tax Act to provide for an alternate dispute resolution mechanism which will facilitate expeditious resolution of disputes on a fast track basis."
The government is urged to find some meaningful alternative to DRP so that foreign companies' tax disputes are settled expeditiously.
hp.agrawal@sskmin.com
a.gupta@sskmin.com
