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Budget 2018 – Transfer Pricing Hits and Misses

February 1, 2018 3260 Views
Gaurav Jain
Chartered Accountant
Chartered Accountant

In light of the forthcoming general elections in 2019, the expectations from the 2018 Budget were running high. Reflecting the Central Government's continued focus on digitization, sanitation, alleviation of poverty and ease of doing business in India, substantial initiatives have been introduced in the past and have also been proposed in the current budget to generate employment, create self-sufficiency amongst the poor and put the country on the fast track of economic development. The rising Gross Domestic Product ("GDP") numbers, declining fiscal deficit and the notable rise taken by India in the World Bank's 'ease of doing business' list are testimony to the fact.

On Transfer Pricing front, the Government has provided a relief to taxpayers by proposing to extend the time allowed for furnishing the Country by Country Report ("CbCR") to twelve months from the end of the reporting accounting year. The move aligns Indian Transfer Pricing ("TP") Regulations with the Organisation for economic cooperation and development ("OECD") guidelines.

Further, the aligning the due date for furnishing of the CbCR by the Constituent Entity in India, the parent entity of which is outside India, with the reporting accounting year of parent is a welcome move. Similarly, the due date for furnishing the CbCR by the Alternate Reporting Entity (ARE) has been aligned with its local jurisdiction timelines.

However, the budget has been somewhat short of other Transfer Pricing expectations. To give impetus to the goal of aligning it with the Global Regulations and curb the soaring litigation on transfer pricing affairs, anticipations were high around various simplification measures, especially mentioned below:

1. Master File Regulations

In the recently notified regulations with respect to master file, the threshold for its applicability has been kept at consolidated group turnover of INR 500 Cr accompanied with aggregate intercompany transaction(s) of INR 50 Crore, which is significantly lower than the OECD recommendations/global trend. This has brought a lot of med-sized taxpayers into the net of master file compliance. Also, the additional disclosure requirements has imposed material burden on a lot of taxpayers. Some relief on this front was anticipated. However, the same has been left unaddressed in the proposed budget.

2. Safe Harbour Rules ("SHR")

The recently amended safe harbour rules have been an attempt towards resolving TP disputes, bringing certainty and facilitating ease of doing business. However, the same has not been met with a positive response from the industry participants. The Operating Profit margin of 18% with respect to Information Technology ("IT") / Information Technology enabled Services ("ITES") is still on the higher side. Further rationalising the prescribed margins would have immensely helped in popularising the scheme, resulting in lower compliance burden and litigation.

3. Secondary Adjustment & Limitation on interest deductions

Finance Act, 2017 inserted section 92CE i.e. secondary adjustment which provided for adjustment in the books of accounts of the tax payers to reflect actual allocation of profits between the taxpayers and its Associated Enterprise(s) ("AE") in line with the Arm's length price ("ALP") so determined. However, a clarification on the basis of allocation of the secondary adjustment amount in case of multiple AEs where entity level Transaction Net Margin Method ("TNMM") has been used for benchmarking the transaction would have been a desirable move.

Further, section 94B of the Income Tax Act provides for limitation on interest deduction for interest in excess of 30%. In this regard, a group ratio rule, as advocated by OECD, in addition to fixed ratio rule would have provided solace to genuine taxpayers having high interest expense due to their nature of business.

4. Specific guidelines on complex transfer pricing issues

Transactions such as intra-group services and marketing intangibles are the subject of high pitched litigation. However, there is no clear guidance available on such transactions in the Indian TP Regulations. Certain provisions would have gone a long way in easing the burden:

  •   Specific regulations providing guidance on documentation evidencing the actual receipt of services – In a lot of cases, TP officers compute nil ALP for service transactions holding that no services have been received. Some guidance on this front would have brought certainty to taxpayers.

  •   Provisions substantiating the importance of expected benefits over actual profits - this shall encourage tax payers to maintain an expected cost – benefit analysis for potential services to be received as a means to avoid / reduce litigation.

Overall, the budget has focussed on boosting the growth and employment in the country. On the transfer pricing front the Government has maintained a status-quo. However, seeing the general enthusiasm of the Government, one can hope and expect that the unattended areas shall soon be confronted through subsequent notifications and amendments.

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