Fine-tuning transfer pricing law
T.C.A.RAMANUJAM
Share · print · T+
T.C.A.RAMANUJAM Related
PHOTOS
Foreign firms with operation in India enjoy greater opportunities to
avoid Indian taxes. Methods of tax avoidance in India include routing
profits through subsidiaries located in tax havens. This, however, is
old and hackneyed. The latest technique takes advantage of a provision
in the US tax laws enabling the foreign company to reduce its tax
liabilities.
According to the US law, American firms need not pay tax on their
non-American income if they declare that they will not repatriate the
money to the US. This avoids tax in their home country.
Companies having intellectual property rights resort to
round-tripping. The American parent can sell the patents to a
subsidiary in a low tax country and such subsidiary can receive
royalty payment from the American parent. We are also familiar with
parent company investing in Indian company through Mauritius. The
Indian company can buy-back the shares and repatriate the profits to
Mauritius.
UNDERSTATING INCOME
The modern practice, however, concerns the transfer pricing law.
Expenses are allocated to high tax countries and profits to low tax
countries. According to NASSCOM, the Association for the IT industry
in India, there are about 750 captives in the country employing
400,000 professionals and accounting for $10.6 billion in revenues. It
is these software companies that take full advantage of transfer
pricing to understate income from Indian operations. Foreign IT firms
make clever use of tax laws and take advantage of tax arbitrage
between nations to minimise their tax liabilities in India.
Tax administration in India has woken up to the reality and found that
transfer pricing resulted in a revenue of Rs 22,800 crore being
understated in 2010-11 by the Indian arms of foreign companies. The
Finance Minister has taken note of the tendency to shift profits from
India since India exhibits higher growth and profitability than other
countries. The normal rule is that the cost of service that the Indian
subsidiary provides to the parent should be similar to what it would
be in the case of an unrelated party. When companies undervalue
related party transactions, it is called mis-pricing.
DISPUTE RESOLUTION PANEL
Transfer pricing audit is at a nascent stage in India. Departmental
Officers often take a conservative view of the transaction leading to
disputes. Finance Act, 2009 created an alternative dispute resolution
mechanism within the income tax department to provide speedy disposal
of the cases. This took effect from October 1, 2009.
The Panel comprises of a collegium of three Commissioners of Income
Tax constituted by the Central Board of Direct Taxes for this purpose.
Any variation in the income or loss proposed by the assessing officer
must be referred to the Dispute Resolution Panel (DRP) if such
variation is prejudicial to the interest of the assessee.
Under Section 144C of the IT Act, 1961, the Panel can go into the
objections and issue such directions as it thinks fit for the guidance
of the assessing officer to enable him to complete the assessment.
The Panel must consider the draft order proposed along with the
objections and evidence from the company and examine the records
relating to the draft order. The panel may confirm, reduce or enhance
the variation proposed in the draft order, so however, that it shall
not set aside any proposed variation or issue any direction for
further enquiry. In the latest ruling on the subject, the Karnataka
High Court examined the powers of the DRP under Section 144C. The
question involved was the entitlement of the company to exemption
under Section 10A of the Act.
The draft order had proposed rejection of the excess claim for relief.
There was no finding in the draft order that the company was not
entitled to the benefit under Section 10A. The DRP held that the
company was not entitled to exemption under 10A at all and issued
directions to the assessing officer to deny the exemption claim in
Toto. Normally, the directions of the DRP are binding on the assessing
officer. In the case before the Karnataka High Court, there was no
proposal to hold that the company is not entitled to any benefit under
Section 10A.
It was only the excess claim that was rejected in the draft order. The
DRP, held the High Court, had no jurisdictions to deny the whole claim
under Section 10A. The order of the DRP was set aside.
The court did not go into the merits of the case. It observed that no
exemption was available under Section 10A, action can be taken under
Section 147 of the Act in accordance with law. The rights of revenue
should not be compromised. A perusal of the judgment in 338 ITR
GE.I.T.C.P. Ltd, vs. DRP, Karnataka will indicate how complicated the
provisions of the transfer pricing law are at the moment.
(This article was published in the Business Line print edition dated
November 14, 2011)
--
CA Ramachandran Mahadevan,M.Com.,F.C.A.,
T.C.A.RAMANUJAM
Share · print · T+
T.C.A.RAMANUJAM Related
PHOTOS
Foreign firms with operation in India enjoy greater opportunities to
avoid Indian taxes. Methods of tax avoidance in India include routing
profits through subsidiaries located in tax havens. This, however, is
old and hackneyed. The latest technique takes advantage of a provision
in the US tax laws enabling the foreign company to reduce its tax
liabilities.
According to the US law, American firms need not pay tax on their
non-American income if they declare that they will not repatriate the
money to the US. This avoids tax in their home country.
Companies having intellectual property rights resort to
round-tripping. The American parent can sell the patents to a
subsidiary in a low tax country and such subsidiary can receive
royalty payment from the American parent. We are also familiar with
parent company investing in Indian company through Mauritius. The
Indian company can buy-back the shares and repatriate the profits to
Mauritius.
UNDERSTATING INCOME
The modern practice, however, concerns the transfer pricing law.
Expenses are allocated to high tax countries and profits to low tax
countries. According to NASSCOM, the Association for the IT industry
in India, there are about 750 captives in the country employing
400,000 professionals and accounting for $10.6 billion in revenues. It
is these software companies that take full advantage of transfer
pricing to understate income from Indian operations. Foreign IT firms
make clever use of tax laws and take advantage of tax arbitrage
between nations to minimise their tax liabilities in India.
Tax administration in India has woken up to the reality and found that
transfer pricing resulted in a revenue of Rs 22,800 crore being
understated in 2010-11 by the Indian arms of foreign companies. The
Finance Minister has taken note of the tendency to shift profits from
India since India exhibits higher growth and profitability than other
countries. The normal rule is that the cost of service that the Indian
subsidiary provides to the parent should be similar to what it would
be in the case of an unrelated party. When companies undervalue
related party transactions, it is called mis-pricing.
DISPUTE RESOLUTION PANEL
Transfer pricing audit is at a nascent stage in India. Departmental
Officers often take a conservative view of the transaction leading to
disputes. Finance Act, 2009 created an alternative dispute resolution
mechanism within the income tax department to provide speedy disposal
of the cases. This took effect from October 1, 2009.
The Panel comprises of a collegium of three Commissioners of Income
Tax constituted by the Central Board of Direct Taxes for this purpose.
Any variation in the income or loss proposed by the assessing officer
must be referred to the Dispute Resolution Panel (DRP) if such
variation is prejudicial to the interest of the assessee.
Under Section 144C of the IT Act, 1961, the Panel can go into the
objections and issue such directions as it thinks fit for the guidance
of the assessing officer to enable him to complete the assessment.
The Panel must consider the draft order proposed along with the
objections and evidence from the company and examine the records
relating to the draft order. The panel may confirm, reduce or enhance
the variation proposed in the draft order, so however, that it shall
not set aside any proposed variation or issue any direction for
further enquiry. In the latest ruling on the subject, the Karnataka
High Court examined the powers of the DRP under Section 144C. The
question involved was the entitlement of the company to exemption
under Section 10A of the Act.
The draft order had proposed rejection of the excess claim for relief.
There was no finding in the draft order that the company was not
entitled to the benefit under Section 10A. The DRP held that the
company was not entitled to exemption under 10A at all and issued
directions to the assessing officer to deny the exemption claim in
Toto. Normally, the directions of the DRP are binding on the assessing
officer. In the case before the Karnataka High Court, there was no
proposal to hold that the company is not entitled to any benefit under
Section 10A.
It was only the excess claim that was rejected in the draft order. The
DRP, held the High Court, had no jurisdictions to deny the whole claim
under Section 10A. The order of the DRP was set aside.
The court did not go into the merits of the case. It observed that no
exemption was available under Section 10A, action can be taken under
Section 147 of the Act in accordance with law. The rights of revenue
should not be compromised. A perusal of the judgment in 338 ITR
GE.I.T.C.P. Ltd, vs. DRP, Karnataka will indicate how complicated the
provisions of the transfer pricing law are at the moment.
(This article was published in the Business Line print edition dated
November 14, 2011)
--
CA Ramachandran Mahadevan,M.Com.,F.C.A.,
No comments:
Post a Comment