The revenue department is soon expected to issue a notification prescribing the grounds under which transactions by companies suspected of violating the transfer pricing norms need to be referred to the newly-constituted transfer pricing cell.
The department has already notified the formation of a cell under the director general for international taxation. The cell will have a nodal officer in every major income tax zone.
As every tax assessment officer might not have the expertise to deal with suspected violations of the transfer pricing norms, the government had decided to lay down the parameters for their reference, government sources said.
The parameters will help field-level officials decide if there has been any misdeclaration of tax liability.
However, if a company was referred to the cell it would not necessarily mean it had been found guilty of tax malpractices, the sources added.
Legislation relating to transfer pricing is based on the principle that financial transactions between two related companies must be at an arm's length to be considered a fair one.
The revenue department is expected to specify that deviations from the arm's length price should not be more than 5 per cent for a transaction to be considered fair.
The department is also expected to lay down the definition of a 'permanent establishment' and address issues like 'thin capitalisation'.
These issues have assumed importance now because companies doing business overseas will have to submit their transfer pricing returns from the current financial year.
The transfer pricing norms were introduced in the Budget for 2001-02 on an experimental basis. For the assessment year 2002-03, companies had been allowed to file their returns under the new tax scheme on a voluntary basis.
However, it is now mandatory for companies, which fall under the ambit of the transfer pricing norms, to file the additional returns along with their regular tax returns.
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