I-T softens transfer pricing blow on MNCs

FY14 sees 16% decline in adjustments; department adds only Rs 59,000 crore to the profits attributed by multinationals, against Rs 70,000 crore a year ago

The tax department has estimated a 16 per cent drop in the income “under-reported” by Indian subsidiaries of multinational companies this year, signaling a reduction in disputes with regard to pricing of cross-border transactions between related parties.

It added only Rs 59,000 crore (Rs 590 billion) to the profits attributed by MNCs to their group companies doing business in India, against Rs 70,000 crore (Rs 700 billion)  a year ago—the highest ever. The additional income will be taxed at 30 per cent.

The adjustment to the income is made when the assessing officer believes the transaction was not done at the price that would have been charged to an unrelated party.

The fall this year is due to courts disposing some cases and the tax department’s greater experience in assessing cross-border transactions. More importantly, tax officials are wary of such cases after getting flak from industry for being “too aggressive”. The department has asked officers to provide detailed reasons to an assessee while passing a tax order.

“Most companies that received notices last year have been sent orders this year, too. So, there is no decline in the number of cases, but the adjustment per case has come down,” a tax department official told Business Standard seeking anonymity.

Shell received a transfer pricing adjustment order of over Rs 3,000 crore (Rs 30 billion) this year, against Rs 15,000 crore (Rs 150 billion)

last year. Vodafone also got an order for undervaluing its transaction with its parent company by Rs 3,000 crore. Both have disputed these claims in court, and more companies that received orders are expected to follow suit. Essar, Bharti, Microsoft, Maruti, Gillette and IBM are among other companies to get adjustment orders.

Transfer pricing disputes in India accounted for 70 per cent of the world’s total by volume, said a report by the Indian Council for Research on International Economic Relations. It said the US had  only six transfer pricing cases in litigation, while Singapore, Germany and Taiwan had none.

Of the 3,200-odd transactions audited in 2012-13, Rs 70,000 crore was found under-reported in around 1,600. In 2011-12, the figure was Rs 44,531 crore (Rs 445.31 billion)in 1,343 deals.

According to an expert, fewer cases were scrutinised this year by some assessing officers. He said an assessing officer in Mumbai audited only 18-19 transactions this year, down from 170-180 a year ago.  “Perhaps, there is a realisation a little bit of harassment was happening. Many judgments are coming in favour of industry,” said Rakesh Nangia, managing partner, Nangia & Co, an accounting firm.

Another official said the tax department had grown conscious of its image after last year’s spurt in claims.

Transfer pricing is a new subject for India and the tax department is short of staff qualified to deal with it. The US has five officers for every audit, in India an assessing officer conducts 60. The department has asked these officers to frame orders based on international best practices.