Transfer Pricing Insider
Volume 3, Issue 1
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Recent Indian Transfer Pricing Rulings - Robust
Documentation is the Key
Source: Partho Dasgupta, Deloitte Haskings & Sells in Delhi
Rulings in the past year indicate that, despite a late start, India's transfer pricing rules are developing in line with those of other more experienced jurisdictions.
India adopted a transfer pricing regime quite late, with the regulations applying only from April 1, 20011. Hence, it would be fair to assume that India's transfer pricing regime would take some time to mature. In the past year, however, several tribunal rulings negate this assumption. As the discussion below shows, the rules developing in India are in line with other jurisdictions that have a longer transfer pricing history.
Being new to transfer pricing regulations, all players - taxpayers, tax advisors, and tax authorities - have been grappling with the determination of transfer prices. Taxpayers and tax advisors look to the tax authorities for clear guidance but, for various reasons, this direction has not emerged from the tax audit process or the regulations themselves. Consequently, there have been divergent approaches to the issues. The success of an approach depends on whether it is accepted in an audit. This is not always a good situation. Obtaining finality with respect to an adjustment can be a long process. A taxpayer that is aggrieved with an audit may approach the Commissioner of Income Tax (Appeals) (CIT (A)), who is a part of the Revenue Department. An order of the CIT (A) can be appealed to the Income Tax Appellate Tribunal ("Tribunal"), which is independent of the Revenue Department and is the last fact-finding body. There are several benches of the Tribunal. Both taxpayers and tax authorities can appeal the Tribunal's order to the High Courts and thereafter in the Supreme Court of India. Although the Tribunal's order is not final, it carries a lot of weight. Until a higher court reverses the order, it is binding on the CIT (A) in his jurisdiction and is persuasive in other jurisdictions.
This article analyzes some of the key contentious issues that the Tribunal has addressed in various recent rulings. Most of the rules that emerge are very close to the international norms.
Contemporaneous Data Vis-a-Vis Current-Year Data
One of the issues that has been drawing attention concerns data that should be used for comparable companies; a related issue is how to define 'contemporaneous data." A common practice adopted by taxpayers, particularly when applying the transaction net margin method (TNMM), has been the use of multiple-year data for comparable companies during the benchmarking process. This practice is driven by the paucity of available current-year financial details in databases at the time that documents are prepared. Absent current-year data, taxpayers often use a company's previous two years' financial results to compare the appropriate profit-level indicator (PLI) with the "tested party."
1For recent coverage of transfer pricing in India, see Sekar, Sidhwa, Subramanian, and Dhameja, "Indian Update," 19 JOIT 54 (May 2008); "Tax Tribunal Issues Judgments on PEs and Profit Attribution," E&Y Foreign Desk, 19 JOIT 10 (April 2008); Sekar, Ghosh, Sidhwa, Venkatesh, Dhameja, and Subramanian, "Indian Update," 19 JOIT 56 (April 2008).
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