Transfer-pricing (TP) has been a contentious area and subject to protracted litigation. Increased transparency, greater clarity, administrative reforms and the overhaul of dispute resolution mechanisms have been the new government’s priorities in reducing TP litigation, restoring investor confidence and increasing India’s attractiveness as an investment jurisdiction. Key changes have been introduced in the Union Budget in the area of TP.
Advance pricing agreements (APAs), which are generally valid for a period of five years, have allowed Indian taxpayers to proactively achieve greater certainty on their TP methods with one or more of the tax authorities. A roll-back mechanism has been introduced to deal with arm’s length price (ALP) issues relating to transactions entered into during the period prior to APA filing. APAs can now also have retrospective effect to cover up to the four years prior to the first prospective year covered under the APA, provided the facts and circumstances of international transactions are similar.
APAs filed being applicable for FY16 onwards may be rolled back as far as FY12. This could enable taxpayers to attain certainty in their transfer prices for international transactions occurring over a period of up to nine years in total (FY12 to FY20). The roll-back option will help taxpayers to conclude open litigation matters peacefully. It would be applicable to APAs signed after October 1, 2014, where the APA specifically recites about its applicability for roll back for the past years.
The finance minister has introduced the globally accepted norms relating to the determination of ALP. They may reduce litigation around the issue of comparability/benchmarking analysis. The range concept, though not reflected in the Finance Bill, may be subsequently introduced through rules/circulars or at the time of enactment of the Finance Bill.
ALP is determined as the arithmetic mean of the range of margins. No comparable companies achieve a perfect level of comparability with the taxpayer so as to transact at the same price or earn the same margin, which has led to manifold tax disputes. The adoption of the internationally-accepted concept of range, which includes a sizeable number of comparables, will provide clarity on this issue and reduce disputes at the first level of assessment.
The use of multiple-year data (instead of single-year) should be allowed for comparability analysis. The detailed rules in this regard will be announced subsequently.
TP rules provide that only contemporaneous data should be considered as far as possible for the purpose of comparing an uncontrolled