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Budget 2014: Transfer Pricing Changes & Impact

Published on Thu, Jul 10,2014 | 14:40, Updated at Thu, Jul 10 at 14:40Source : 

By:Samir Gandhi, Partner - Deloitte Haskins & Sells

Transfer Pricing- Budget 2014

In the recent past, transfer pricing has been a significant area of concern at India. More than 60% of the audit cases have suffered transfer pricing adjustments.

Certain regulatory and administrative reforms were expected, to reduce / minimize potential TP litigations and create an efficient dispute resolution mechanism that will address the concerns of the taxpayers &increase the attractiveness of India as an investment jurisdiction.

Major proposals in the Budget Proposals are :


In India, Arm’s Length Price (‘ALP’) is determined as the arithmetic mean of the range of prices / margins leading to disputes in majority of the cases. It is a fact that no comparable enterprise can operate at the exactly at the identical level of comparability as the taxpayer / comparables  so as to transact at the same price or earn the same margin. Moreover, there are limitations in information available of the comparables and some comparability defects remain that cannot be identified and adjusted. Computing of arithmetic mean as an average of the prices / margins obviously gets distorted by the extreme values & hence does not give a true arm’s length price / margin .

Tax payers as well as tax administrators have gained significant understanding and learning in the data analysis and for the benchmarking processes.

Adoption of internationally accepted concept of range -which includes a sizable number of comparables (statistical tools that take account of central tendency to narrow the range e.g. the inter-quartile range will help to enhance the reliability of the analysis) of such prices /margin will be a step in right direction. This will also reduce disputes at the assessment stage itself.


Currently, taxpayers are required to undertake year by year analysis. Prices / Margins in a particular year may be affected due to various economic reasons which can have a material effect on transfer pricing conditions, Product and Life cycle of the enterprise also varies from year to year and industry to industry. Use of multiple year data would now address this issue and will also improve the selection of comparables for e.g. a significant variance in margin from year to year may lead to rejection of that comparable.


As the name itself suggests, APA covers transactions in future. Many times APA addresses issues which are under disputes for the past years. When the outcome is agreed in an APA are considered to have applications for prior years, it is beneficial for tax payers as well as tax authorities to apply for such outcomes to the past disputed years.

The APA program at India will be now more successful with this proposal of roll back, as it will give certainty to all stake holders and will reduce the cost of litigation, especially where the normal appeal process is time consuming with uncertain outcomes.


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