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Raising
the Bar: Are you still getting covered?
In
a recent move that will benefit the multinational companies entering
into international transactions (as defined in the Indian transfer
pricing regulations) with their Indian affiliates, the Finance
Ministry has decided to increase the threshold limit for transfer
pricing scrutiny of international transactions from INR 5 crore
(approx. USD 1.10 million) to INR 15 crore (approx. USD 3.30 million).
The Indian transfer pricing regime was introduced in 2001 to plug
the possible revenue leakages arising from the manipulation of
prices of international transactions entered into by Indian entities
with their overseas affiliates. In 2003, the Central Board of
Direct taxes ("CBDT"), vide its Instruction No. 3 of 2003
(261 ITR (St.) 0051), had laid down that wherever the aggregate
value of international transactions crosses the threshold of INR
5 crores, it should be referred to the Transfer Pricing Officer
("TPO") and picked up for "compulsory scrutiny". The transfer
pricing audits for the fiscal years 2001-02 and 2002-03 have already
been completed by the TPOs and transfer pricing adjustments to
the extent of approximately INR 3,200 crores (approx. USD 71.1
million) have been made to the profits of the taxpayers.
The
INR 5 crore threshold has been perceived for a while as being
too low and has been creating a compliance and administrative
burden on both the taxpayers and the Indian tax authorities. Keeping
the above in perspective, recently the Finance Ministry has decided
to increase the threshold limit for "compulsory scrutiny" of international
transactions from the existing INR 5 crore to INR 15 crore. Thus,
all cases, where the aggregate value of international transactions
exceeds INR 15 crore, will be taken up for compulsory scrutiny
by the Indian tax authorities. It is expected that this move would
significantly reduce the compliance costs of majority of multinational
companies having international transactions with their Indian
affiliates.
The
above enhancement of threshold has currently been finalized by
CBDT for scrutiny of non-corporate taxpayers for the fiscal year
2006-07. However, senior Finance Ministry officials have indicated
that the new norms are set to apply for compulsory scrutiny of
corporate taxpayers as well. This would be a welcome relief for
the sectors such as banking, diamond trade, IT, ITES, auto and
pharma, which have been hardest hit by the recently concluded
transfer pricing audits, due to the large number of international
transactions entered into by the entities operating in these sectors.
In
addition to above change, it also remains to be seen whether the
Indian tax authorities would consider introducing "safe harbour"
provisions for service providers where a specified mark-up over
their costs would be deemed to meet the Indian transfer pricing
regulations. Such a move could further ease the compliance costs
for the Indian tax authorities and the taxpayers.
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You
can direct your queries or comments to the authors
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Source:
The
Economic Times (dated June 19, 2006) - "Transfer
pricing scrutiny limit to be tripled".
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