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Significant Changes In The Indian TP Regulations

Published on Wed, Jul 16,2014 | 18:38, Updated at Wed, Jul 16 at 18:38Source : 

By: Karishma Phatarphekar – Partner, Global Transfer Pricing Services, KPMG India

Furthering the “Modi-fied” Government’s mantra – “Minimum Government Maximum Governance” and “Sab ka Saath Sab ka Vikas”, the Hon’ble Finance Minister has an uphill task ahead of him and has taken up the challenge of continuing with the last governments target of limiting the Fiscal deficit to 4.1% in 2014-2015 and proposing to reduce it to 3.6% and 3% in the next 2 years.

The Government has finally and whole-heartedly acknowledged the fact that ever intensifying Transfer Pricing (TP) audits in India need to be checked and curtailed. The Finance Minister – Mr. Arun Jaitley (FM), conveyed to the investor community at large that the Government is committed to provide a stable and predictable taxation regime that would be investor friendly and spur growth Para 10, Budget Speech 2014-15.

Towards this direction, keeping in mind the desperately needed certainty in the investment climate, the FM, today proposed a few positive and significant changes in the Indian Transfer Pricing regulations. Amongst other TP proposals one of most important proposal is relating to rollback mechanism in the Advance Pricing Agreement (APA) scheme. The APA regime was introduced in 2012 and has received an overwhelming response from the taxpayers. However, the current APA regime was available only for future years and could not be applied to past years where returns were filed or litigation was pending. The rollback provisions will enable the taxpayers to apply the APA not only to 5 future years but can also be applied to 4 years preceding the previous year for which it is filed. For e.g. the first year in which APA was applicable was financial year 2013-14, therefore this provision will allow a roll back for preceding 4 open years i.e. from FY 2009-10 to FY 2012-13. Currently TP audits are ongoing for FY 10-11. Therefore, for cases completed last year i.e. for FY 2009-10 instead of preferring an appeal the tax payer will have an option to roll back the APA if concluded after October 1, 2014. This is a commendable change that will help curtail the long drawn litigation for many taxpayers once an APA is executed.

Also there are certain welcome proposals in respect of allowability of multiple year data and use of price range for determination of Arm’s Length Price (ALP), which are indications that the Indian TP regulations are now coming at par with the international best practices and the foreign investors can consider India as a fair and taxpayer friendly destination.

Another important amendment is in respect of applicability of TP provisions to transactions between two independent enterprises where the pricing arrangement was pre-decided or influenced by the Associated Enterprise (AE) of one of the parties. There have been certain Tribunal rulings including that of Mumbai Tribunal in case of Kodak India Kodak India Private Limited Vs. Addl. Commissioner Of Income Tax ( ITA No. 7349/Mum/2012 ), where it has been ruled that even if the pricing between two domestic independent entities in India, is pre-decided or in any way influenced by AE of one of the entities, the domestic transaction cannot be subjected to TP regulations. These rulings were based on the provisions of section 92B(2) of the Income-tax Act, 1961 (I.T.Act), which states that a transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purpose of sub-section (1) to section 92B, be deemed to be a transaction entered into between two associated enterprises, if  there exists a prior agreement in relation to the relevant transaction between such other person and associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise. The following example can be used to explain the Tribunals stand in this case:    

In the above example if there is a global sale of business of ABC USA to PQR USA, as a result of which the business of ABCs Indian subsidiary -ABC India is sold to PQR India, the Mumbai Tribunal had ruled that in order for transfer pricing regulations to be applicable two conditions were to be met (i) the transaction could be deemed to be an international transaction if either or both the parties to the transaction were  non-resident, (2) if the provisions of section 92B(2) were to apply there was required to be an AE relationship between ABC India and PQR USA or between PQR India and ABC USA, through which the influence was exercised.  

Only to avoid such transactions between two independent parties which are in ‘form’ independent but in substance pre-determined and/ or influenced by Associated enterprises, the above amendment has been made to section 92B(2) of the I.T.Act.

It goes without saying that overall, the changes proposed in the Indian Transfer pricing regulations are encouraging and expected to boost investor confidence and bring about a positive change in the investors outlook towards doing business in India.

(The views in the above article are personal views of the author. She was assisted by Anuradha Rathod, Senior Manager, KPMG)


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