India introduces key transfer pricing changes

International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

India introduces key transfer pricing changes

home-logosmall.gif

The new Direct Taxes Code tabled by the Indian finance minister has proposed some sweeping changes in the area of transfer pricing, explain Rohan Phatarphekar and Hardev Singh

home-logosmall.gif

The changes proposed would be effective from April 1 2011, subject to deliberations at industry and professional forums before going through the motions in Parliament.

The code has proposed these key changes for transfer pricing regulations:

  • Introduction of an advance pricing programme;

  • Changes to the definition of associated enterprises;

  • Procedural changes to dispute resolution mechanism, assessments and statutory filings;

  • Changes to penalty provisions; and

  • Introduction of general anti-avoidance rules.

The highlights of the advance pricing programme are:

  • An advanced pricing agreement (APA) has been defined as an agreement between a taxpayer and the tax authorities for the upfront determination of the arm’s-length price and pricing methodology in relation to an international transaction;

  • An APA would be valid for a period specified in the APA, up to a maximum of five consecutive financial years;

  • An APA would not be binding in case of a change in the law and on the basis of which it was finalised;

  • The determination of the arm’s-length price is subject to suitable or necessary adjustments made by the Central Board of Direct Taxes (CBDT);

  • The arm’s-length price determined by the APA would not be disturbed by any other provisions of the proposed code;

  • In relation to the international transactions, the APA would be binding on the taxpayer and the commissioner of income-tax and his subordinate income tax authorities.

The introduction of APAs is a welcome measure and should provide a fair degree of certainty to business transactions, given the state of transfer pricing litigation in India. The challenges nonetheless will be in the timely disposal of APA applications and the flexibility and willingness shown by the authorities to dispose of complex applications. Also clarity about the treatment of pending matters not covered by the APA programme will have to be looked at.

Changes to the definition of associated enterprises

The definition of associated parties has been modified to omit the reference of direct or indirect participation in management, control or capital. The definition now seeks to illustrate directly the relationship between two associated enterprises. These changes have been proposed:

  • A direct or indirect shareholding has reduced from 26% to 10%;

  • A loan by one enterprise as a percentage of book value of total assets of the other enterprise has been reduced from 51% to 26%;

  • Power to appoint board of directors has been reduced from more than half to more than one-third of the governing board; and

  • The dependence by one enterprise on another for raw materials for manufacture, has been reduced from 90% or more to two-third or more.

The proposed changes widen the scope of transfer pricing compliance and would also bring into its ambit, transactions with strategic or financial investors.

Procedural changes to dispute resolution mechanism, assessments and statutory filings have also been proposed. These include that:

  • The code proposes that the Dispute Resolution Panel would only deal with cases in respect of adjustments of more than Rs2.5 million ($52,000);

  • The annual accountant’s report would now have to be filed with the transfer pricing officer (TPO) instead of the assessing officer;

  • The due date for filing the accountant’s report has been advanced to August 31, from September 30;

  • The selection of transfer pricing cases for detailed scrutiny would be based on a risk management strategy as may be framed by the CBDT. This strategy would be confidential and would not be shared with the taxpayers; and

  • The time limit for selection of cases by the TPO is proposed to be within two months from the end of the financial year in which the accountant’s report has been filed.

The selection of cases for audit based on a risk management strategy is a step in the right direction, as all cases more than a specified monetary limited are being selected for audit now.

Changes to penalty provisions

  • The penalties for non-filing of the accountant’s report has been proposed at between Rs50,000 to Rs200,000 ($1,040 to $4,160);

  • The penalties for non-maintenance of documentation has been proposed at between Rs50,000 to Rs200,000 as against 2% of the value of the international transaction;

  • The penalties for non-furnishing of documentation has been proposed between Rs5,000 to Rs100,000 as against 2% of the value of the international transaction; and

  • No tax authority would have the power to waive the penalties.

The code has defined certain arrangements as “Impermissible Avoidance Arrangements” whose main purpose is to obtain tax benefits and depart from the arm’s-length principle. These arrangements would be covered by the anti-avoidance measures. The new anti-avoidance rules will have a treaty override. The measures seek to amend or disregard or recharacterise such arrangements.

The code seeks to give significant powers to the tax authorities. It remains to be seen how ready corporates and the tax administration are to accept these changes in their entirety. We believe that the proposed code will undergo some changes before we see it in its final form.

Rohan Phatarphekar, executive director, national head of transfer pricing, KPMG andHardev Singh, director, BSR and Company



more across site & shared bottom lb ros

More from across our site

A German economics professor was reportedly ‘irritated’ by how the Finnish ministry of finance used his data
Countries that care about the fair taxation of tech multinationals and equitable global distribution of wealth should back the UN’s tax framework, writes economist Abdelmalek Riad
The cuts disproportionately affected staff in certain positions, the report also found; in other news, MHA announced the €24m acquisition of Baker Tilly South East Europe
The plan aims to improve the efficiency, transparency, and effectiveness of direct tax administration in India
Meanwhile, South Africa’s finance minister has accepted a court decision on suspending a VAT increase and US President Donald Trump mulls a 100% tariff on foreign films
Jaime Carey speaks about the benefits of his tax background, DEI values, the use of AI for a smarter legal practice, and other priorities that will define his presidency
Historically low levels of attrition over consecutive years made a ‘difficult decision’ necessary, PwC has reportedly said
WTS Global is also vetting new potential member firms in Algeria, Cote D’Ivoire and Benin, Kelly Mgbor tells ITR in an exclusive interview
The scope of qualifying pillar two tax credits could reportedly be broadened; in other news, hundreds of IRS appeals staff are to resign
For many taxpayers, the prospect of long-term certainty that a bilateral APA offers can override concerns about time, cost and confidentiality
Gift this article