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Global IT majors such as Microsoft, Accenture and Cognizant which give large outsourcing contracts to their captive units in India may have to wait for about two more years to benefit from the ‘safe harbour’ norms that the government has released earlier this month to reduce tax disputes on cross-border transactions.
Government officials told FE the threshold of R100 crore a year of international transactions for an entity to be eligible for taking benefit of the safe harbour rules, under which value of a specified deal would be accepted without an audit, will stay for two years before a revision.
Industry representatives and tax experts are of the view that due to the R100-crore threshold, large multinationals typically paying their captive units in India higher amounts every year for development work may not be eligible for using safe harbour norms.
The value of cross-border deals between allied entities called ‘transfer price’ that authorities in India examine vigorously to check income suppression has been an area where tax litigation has been rising exponentially.
“Transfer pricing rules in India is a relatively new area of tax regulation. We are introducing safe harbour norms on an experimental basis for two years. The R100-crore threshold could be reviewed in the light of experience after two years,” said a person privy to the implementation of the rules.
MNCs having more than Rs 100 crore cross-border transactions with Indian units will have to accept the tax department’s assessment of their operational profits as well as any possible upward adjustment in their tax liability.
Vijay Iyer, partner & national leader, transfer pricing, EY, said the exclusion of companies with turnover in excess of R100 crore would limit the number of takers for the safe harbour. “There is no need to have such a threshold as there is no strong correlation between turnover and profit margins. MNC units with international transactions of, say, R200 crore may also be having profit margins in the same range of units with less than R100-crore turnover. So, there is no reason why those with higher turnover should be denied the benefit of safe harbour provisions,” said Iyer.
Safe harbour is like a presumptive tax, not an arm’s length price which is arrived at after meticulous benchmarking analysis, said Rahul Mitra, national leader, transfer pricing at PwC India. “Safe harbour is a compromise. That is, if a taxpayer wants to go ahead with meticulous transfer pricing benchmarking, he may