Budget 2018 has laid down no specific guidelines on complex transfer pricing issues
- Blog|Transfer Pricing|
- 3 Min Read
- By Taxmann
- Last Updated on 22 June, 2022
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 Crore accompanied with aggregate inter company 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 92CEi.e. secondary adjustment which provided for adjustment in the books of account 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 focused 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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