Transfer pricing has emerged as a bone of contention between the income-tax department and global automobile majors operating in India.

According to official sources, the I-T department has asked Japanese auto major Toyota to pay around Rs 190 crore (Rs 1.9 billion). Another demand of around Rs 150 crore (Rs 1.5 billion) has been made on Suzuki. These demands were raised in March 2006 for the 2003-04 assessment year, sources said.

The department is of the view that auto components imported by Indian subsidiaries from their parent are not priced according to the arm's length pricing norms, thus violating rules.

Transfer pricing is the method by which the goods imported or loans extended by foreign companies to their Indian subsidiaries or vice versa are priced.

The I-T department is concerned that the margins earned by these companies are not comparable with their peers in the industry.

A faxed query to Toyota Kirloskar Motors, the Indian subsidiary of Toyota, did not elicit any response. Meanwhile, the official spokesperson from Maruti [Get Quote] Suzuki India said Maruti had appealed to the income tax commissioner in this regard. As the matter is subjudice, the company did not comment.

The matter assumes significance as the Central Board of Direct Taxes is considering a proposal to revise the pricing norms.

The proposal says that industries earning a margin of 5 per cent or less than the arm's length price should be linked to the profitability of the industry and not the margin.

This is significant as the transfer pricing norms specify that if the margin varies between 5 per cent of the arm's length price, no adjustments can be made.