Transfer pricing kept at arm’s length by FM in the Budget 2015

March 11,2015
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Maulik Doshi (Partner) and Meghnand Dungarwal (Senior Manager, Transfer Pricing services, Sudit K. Parekh & Co.)

Budget 2015 has introduced several measures, inter alia, towards ease of doing business, manufacturing, infrastructure, poverty alleviation, financial inclusion, and predictability & stability of tax. The foreign investors in particular got a super deal with most of their concerns addressed by the Finance Minister - except one - on transfer pricing.

Transfer pricing has now entered the Board rooms and all strategic business decisions are taken after considering transfer pricing implications. Transfer pricing has also been at the core of tax litigation in India in the past few years. Most of the cases that have made headlines in Indian taxation news have involved transfer pricing issues. The new government showed its resolve to reduce litigation on transfer pricing and provide certainty on the same by bringing in significant amendments in the last Budget. Everyone was taken by surprise - pleasantly though - with these amendments announced by Finance Minister (FM) in July 2014 Budget and were looking forward to the "Acchey Din" but somehow the Acchey Din seems to evade transfer pricing.

Following is a brief discussion on some of the important issues which the FM has given a miss, irrespective of the dynamics of current transfer pricing environment in India.

  1. 1. Advance Pricing Agreement (APA) Roll Back Provisions

The FM had in what was an interim budget announced strengthening of transfer pricing dispute resolution mechanism by introduction of roll back mechanism in APA. Corresponding enabling provisions were also introduced in the Act subject to detailed rules and procedure to be notified by the Government. The intent of Government was to make the toll back provisions effective from 1st October 2014. However, the applicable provisions and rules in this regard are still not notified. There were several instances of similar nature in the previous Government but with the governing style of the current Prime Minister, one had strongly hoped that similar situation does no repeat.

Even though the taxpayers would get certainty for future through an APA, ongoing transfer pricing assessments for the past years are taking a heavy toll in many of the cases. The taxpayers seek to settle the open assessments for past years also by opting roll back mechanism. Further, taxpayers are also keen to understand the approach of APA authorities, for cases where litigation issues are in appeal for past years. All such questions remained unanswered because the Finance bill did not put light on these aspects and left the multinationals with open hands. The APA applicant fraternity will be looking forward to detailed guidelines with respect to the roll back provisions by way of rules or notifications from the Central Board of Direct Taxes (CBDT). Time is crucial since the timeline for filing APA applications to make it applicable for FY 2015-16 onwards is approaching very fast - 31 March 2015.

  1. 2. Use of Multiple Year Data & Inter-Quartile Range

The Budget 2014 has indicated allowance of using multiple year data instead of single year data and inter-quartile range instead of arithmetic mean while calculating the arm's length price (ALP).

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