Monday, June 28, 2010

Income Tax Department is likely to slap a demand of Rs 8,500 crore on foreign companies

The Income Tax Department is likely to slap a demand of Rs 8,500 crore on foreign companies and their domestic subsidiaries which allegedly transferred profits to other countries to reduce tax liability.

"Income Tax Department is likely to raise over Rs 8,500 crore from transfer pricing audits. There has been scrutiny of 8,105 such cases," Finance Ministry sources said.
Transfer pricing deals with the technique where parent companies sell goods and services to subsidiary entities at an inflated price to deliberately reduce profits and tax liability. The law requires that goods and services should be sold to subsidiary companies at arm's length price -- the price at which goods are traded between unconnected companies.

Taxing these units has become a complex area for the revenue department, with the government often disagreeing on the profits declared by a foreign company for its Indian unit.

The sources further said that in the last five years, such tax saving cases have increased rapidly.

To prevent a loss in revenue through the transfer pricing route, the department is planning to notify Safe Harbour Rules soon. The new rules will lay out norms to prevent revenue loss through this route.

"The Income Tax department is planning Safe Harbour Rules to lay down parameters where these adjustments will not be made. It is to be notified shortly," a Finance Ministry official said.

The revenue department would also focus on intangibles such as marketing intangibles, supply chain intangibles, research and development intangibles and patents intangibles, among others, while scrutinizing revenue losses.

"These cases will be selected by the Income Tax Department to raise revenues from companies which have violated the norms. It would be our focus area," the official said.

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