Transfer Pricing

Transfer Pricing has become an important issue internally and affects many multinational enterprises functioning in India. There is a separate code under the sections 92 to 92F of the Indian Income-tax Act,1961 and has been applicable since 1 April 2001 and covers all intragroup transactions. The Transfer Pricing Code specifies the income arising from international transactions or domestic transactions between enterprises that is computed with respect to their arm’s length price. The guidelines elaborating on the framework of the regulations are provided by OECD (Organisation for Economic Cooperation and Development). The various methodologies and documentation required are described in the regulations. Transfer Pricing provisions are directing towards avoiding profits being shifted to offshore jurisdictions from India. The Indian Government has looked into the importance of TP as an international tax issue and has tried to simplify and regulate the norms to change the current situation. In 2016, substantial changes were introduced in the documentations and regulations of Transfer Pricing. There have been significant changes in the financial year 2016-17 and some of these changes need to be discussed.

A secondary adjustment mechanism has been started by The Indian Finance Act, 2017. It creates an additional tax liability for taxpayers either by reduction in expense or addition in income. A primary adjustment is primarily the difference between the transfer price at which a transaction has taken place and the transfer price determined by considering the principle of arm’s length. The secondary adjustment is only applicable after certain primary adjustments that include the adjustments made in accordance to India’s safe harbour rules and the ones arising due to a Mutual Agreement Procedure (MAP) resolution. It also includes adjustments made by Tax Officer (TO), accepted by tax payer and determined by an Advanced pricing Agreement (APA). The primary adjustment is also a representation of the ‘excess money’ that has to be returned to India, failing to do so would result in the money being considered as an advance and interest in computed on it. There are specific rules for interest computation for secondary adjustment, it applies to a primary adjustment amounting to more than INR 10 million in respect to financial year 2016-17 and onwards.

Thin Capitalisation Rules have also been introduced that do not allow deduction of payment of interest under specific conditions. According to a fundamental rule, on claims for payment of interest to overseas related parties, there is 30% earnings before interest, taxes, depreciation and amortization cap. The excess interest that is not allowed in a year is eligible to be carried forward up to eight consecutive years. With the intent to reduce TP related compliance requirements and improve the ease of doing business, the provisions related to expenditure with respect to payments made by taxpayers to domestic parties have been abolished. These expenditures include the payments made to specific people such as parent and sister companies. In the future, domestic transfer pricing provisions would only be applicable to inter company transactions if even one of the parties is engaged in activities eligible for tax holidays.

The Advanced Pricing Agreement (APA) released it’s Annual Report (2016-17) marking the completion of five years of the APA programme. 152 APAs and a total of 815 applications have been recorded in 4 years which is impressive. Two new APA Commissioners in Mumbai and Bengaluru have been appointed in addition to the current APA Commissioners to reinforce teams. Some prominent observations made during the TP audits include efforts to make additions to the extra AMP expenses and in the management fees area, TPOs are considering the option of showing their ALP as nil and are not following the Tribunal’s rulings. Advertising, marketing and promotion-related expenses are the current issue in the Transfer Pricing market and related documentation is a priority for Multinational Enterprises.

The Organisation for Economic Cooperation and Development has worked towards incorporating new issues in the Guidance that include definitions of various terms like revenue, related party revenue and total consolidated group revenue. The options for transitional filing options for multinational groups and treatment of major shareholdings. A three layer Transfer Pricing documentation programme has also been introduced by the government, considering proper implementation of OECD guidelines. Also, taxpayers are required to prepare a local file, a country by country report and a master file. There have been some other notable developments. Amendments have been made in the Safe Harbour Rules (SHRs) and these have been revised. There have been reduction in rates for most transactions and the specified conditions have been modified. Another amendment includes provision of low value adding intra group services as a part of transactions under Safe Harbour Rules. The SHRs have been clearly revised for simplification and a more rationalised approach has been provided. Another development is the revision of the provided DTAA in relation to the India-Cyprus. Both the government of Singapore and India signed the Third Protocol for amendment of the DTAA or the India – Singapore Tax Treaty. At the same time, Korea and India have entered a provision for a tax treaty that has replaced the earlier agreements and has resulted in several revisions opening new windows of opportunities.

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