Holes in transfer pricing
GUEST COLUMN- Dinesh Agarwal & Amit Poddar
The Finance Act, 2012, had introduced the provisions for specified domestic transactions (SDT), extending the laws of transfer pricing to domestic transactions.
One of the criteria for applicability of domestic transfer pricing was that the aggregate value of domestic transactions should be at least Rs 5 crore, which was on a very low side, covering almost all companies, including the small and medium enterprises (SMEs).
Considering the recommendation from a large section of SMEs, finance minister Arun Jaitley has proposed to increase the threshold to Rs 20 crore in the budget for 2015-16. This proposal will take out a large number of SMEs from the requirement of complying with domestic transfer pricing provisions. This amendment will take effect from April 1, 2016, and will apply in relation to the assessment year 2016-17 and subsequent assessment years.
Besides giving relief to some of the domestic companies from complying with the domestic transfer pricing provision, the budget does not address any other issue of transfer pricing. Some of the expectations that remain unaddressed are as follows:
APA rollback: In the last budget, the rollback provisions were introduced for advance pricing agreements (APA), which are not concluded till October 1 2014. Hence, many APAs, where the positions have been agreed upon between taxpayers and the government, have been kept on hold, as the detailed implementation rules for the APA rollback scheme are awaited.
Concept of range in transfer pricing: In budget 2014, the finance minister had introduced the concept of range, which was to replace arithmetic mean for determining arm’s length price. The taxpayers needed clarity on how the range mechanism would be implemented, but the same goes without discussion in this budget.
Use of multiple year data: In budget 2014, the finance minister had proposed to amend the existing transfer pricing regulations to allow the use of multiple year data. However, Finance Bill 2015 continues to remain silent on this matter.
Exclusion of director’s remuneration for domestic transfer pricing: Information on director’s remuneration is confidential to many companies. Further, the management of each company is unique with different skill sets. Hence, it is difficult to benchmark such a transaction under a common umbrella/ approach. Considering the impracticability, there was an expectation among the taxpayers that this transaction would be excluded from the coverage of domestic transfer pricing.
Agarwal is partner and Poddar manager, EY Tax & Regulatory Services
