Thursday, July 9, 2009

Indian Budget High lights on Transfer Pricing Amendments and other relevant areas

The Finance Bill, 2009 has introduced certain amendments in the transfer pricing provisions. The primary amendments are the introduction of the concept of ‘Safe Harbour Rules’ and ‘Alternate Dispute Resolution’(‘ADR’) mechanism.

Introduction of ‘Safe Harbour’ Rules

  • It proposes to introduce ‘Safe Harbour’ rules by empowering Central Board of Direct Taxes, (‘CBDT’) to frame such rules.
  • The concept of ‘Safe Harbour’ suggests that the results declared by the taxpayer who fulfill the prescribed conditions are accepted without detailed scrutiny.
In other words,
  • • to provide the circumstances by the Board (CBDT ) in which the Income-tax authorities shall accept the transfer price declared by the assessee.
  • • the international community is divided on account of demerits associated with it, viz, difficulty in quantification of safe harbor, acceptance of safe harbor rules by one jurisdiction in another jurisdiction which may give rise to double taxation, create tax planning opportunities, and raise the specter of discrimination and distortion of competition.
  • • In view of above, it is expected that the CBDT would give due consideration to all aspects associated with the ‘Safe Harbour’ rules before notifying the same.

Removal of the +/- 5 percent range benefit for calculating the adjustment

  • When more than one price is determined by the Most Appropriate Method, then arithmetical mean is the arm's length price:
  • However, if the arithmetical mean, so determined, is within five per cent of the transfer price, then the transfer price shall be treated as the arm's length price and no adjustment is required to be made.
  • Thus, if the arithmetical mean is not within the +/- 5 percent of the transfer price then the arithmetical mean is determined to the ALP and adjustment would then be required to be made from the ALP.
  • To be effective in case of proceedings pending before transfer pricing officer on 1st October 2009.

Alternative Dispute Resolution Mechanism = Advance Pricing Mechanism (Certain features)

  • Clause 55 of the Finance Bill 2009 has proposed to introduce a new section 144C under the Income Tax Act, 1961 (‘Act’) providing the mechanism of ADR (Alternative Dispute Resolution) akin to the concept of ‘Advance Pricing Mechanism’.
  • only eligible assessee would be governed with the provisions of ADR mechanism.
  • An eligible assessee has been defined as any person in whose case the variation / transfer pricing adjustment is made as a consequence of the order of the Transfer Pricing Officer under section 92CA(3) of the Act and such person should be a foreign company.
  • At this juncture, it is not free from doubts whether assessees other than foreign companies have not been covered within the ambit of the Section 144C of the Act.
  • The proposed provision requires the Assessing Officer to forward a draft order of assessment to the eligible assessee, if he proposes to make any variation/ TP adjustments in the income or loss returned which is prejudicial to the interest of such assessee. Further, the Assessment Order passed under section 143(3) of the Act in pursuance of directions of ADR suggests that the same is not appealable.
  • Further, clarity is required on the scope of income proposed to be covered by the contemplated provisions of section 144C. The Notes to clauses of Finance Bill, 2009 states that the provisions of Section 144C are proposed to cover only of transfer pricing adjustments of the eligible assessee only.
  • However, the draft provisions of section 144C as per Finance Bill 2009 intend to cover all incomes of the eligible assessee.

In other words,

  • Another layer of adjudication added which has authority to provide guidance to the AO;
  • The assessee has to file the objections within 30 days of the draft order being provided by the AO to the assessee;
  • Directions to be issued within 9 months of the draft order provided by the AO to the assessee;
  • The directions issued by the ADR Panel are only appealable in the High Court.

ADR mechanism proposed to facilitate speedy resolution of disputes. Salient features detailed as under:

  1. Only foreign companies/persons having transfer pricing variations / adjustments eligible for ADR
  2. Collaborative process between Assessing Officer, Assessee and the Dispute Resolution Panel (‘DRP’)
  3. DRP would comprise of 3 Commissioners of Income-tax constituted by the Board
  4. Entire process would not exceed 10 months from the date the draft order is provided to the assessee by the Assessing officer
  5. Every direction by the DRP is binding on the Assessing officer
  6. These amendments will take effect from 1st October 2009

Tax Holiday Scheme:

  • The government has extended the STPI tax benefits for one more year. Under the tax holiday scheme, companies which operate out of technology parks pay taxes only on the business they get from India and their export revenues are tax-exempt.
  • The IT industry has pointed out that it is facing difficulties in the assessment of software which involves transfer of the right to use after the levy of service tax on IT software service. To resolve the matter, the Minister proposed to exempt the value attributable to the transfer of the right to use packaged software from excise duty.

The envisaged measures by the Govt. of India, are step in the right direction, the orderly implementation thereof shall only ensure that desired transfer pricing objectives are met. Till such time it happens, one can only wait and observe the initiatives proposed by the Govt.

For enquiries or consulting , contact :
The Author is a renowned expert in transfer pricing matters from Turbo TaxGuru Services pvt. Limited, Hyderabad, India.


The information contained in this communication is intended solely for the use of the individual or entity to whom it is addressed and others authorized to receive it. It may contain confidential or legally privileged information. If you are not the intended recipient you are hereby notified that any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be unlawful. If you have received this communication in error, please notify us immediately by responding to this email and then delete it from your system. The firm is neither liable for the proper and complete transmission of the information contained in this communication nor for any delay in its receipt.