Indian budget makes key changes to transfer pricing provisions
Hardev Singh and Saurabh Dhanuka of KPMG highlight the key changes the Indian Union Budget 2009 makes to the transfer pricing and related provisions of the Income-tax Act, 1961
+/- 5% variance – Option of the taxpayer - annulled
The existing proviso to section 92C(2) of the Act, allows a benefit of 5% variance, at the option of the taxpayer. The benefit claimed by the taxpayers has been annulled prospectively with effect from October 1 2009
Various tribunal rulings in the past had confirmed the availability of a ‘standard deduction’ of 5%, in the case of a transfer pricing adjustment, at the option of the taxpayer. The Finance Bill 2009 proposes to restrict the adjustment only in respect of those cases coming within the +/- 5% variance range. Those cases falling outside the range would not be eligible for the benefit as the option clause has now been omitted.
Interestingly, technically all orders passed before October 1 2009 would be eligible to claim the +/- 5% range benefit, as against, only clean orders.
Section 92CB – Introduction of safe harbour rules
Considering the increase in transfer pricing litigation, the Indian Revenue has legislated for the introduction of safe harbour rules. The rules will be notified in due course by the CBDT.
Safe harbour has been defined to mean ‘circumstances’ in which, the Indian Revenue Authorities shall accept the transfer pricing declared by the taxpayer.
Alternate dispute resolution panel
Considering the judgemental errors in determining transfer prices, the legislation has introduced a dispute resolution panel. The panel would constitute of three commissioners of income-tax.
The procedure is summarised here:
· The assessing officer will issue a draft order to the taxpayer, where a transfer pricing adjustment is proposed.
· The taxpayer will confirm within 30 days, his acceptance of the draft order, or his objections. The taxpayer will have to file his objections before the Dispute Resolution Panel and the assessing officer.
· The assessing officer will pass an order within one month from the end of the month in which the acceptance is received from the taxpayer or the expiry of the period for filing the acceptance/objection.
· The Dispute Resolution Panel would then issue directions for the guidance of the assessing officer to complete the assessment. In providing such guidance, these points would be considered:
o Draft order issued by the assessing officer
o Objections/ evidence filed by the taxpayer
o Reports, if any, passed by the assessing officer, transfer pricing officer or any other authority
o Any other relevant details
· The Dispute Resolution Panel has the authority to make further enquiries or cause further enquiries by other tax authorities.
· The panel may confirm, reduce or enhance the proposed transfer pricing adjustments. It cannot set aside the proposed adjustments for further enquiry.
· In the case of a difference of opinion in the Dispute Resolution Panel, a decision will be taken based on the majority of the panel members.
· The findings of the panel are binding on the assessing officer.
· Before issuing the directions, the panel has to give the taxpayer and the assessing officer an opportunity to (respond).
· The time limit of nine months for the issuing of directions by the panel from the end of the month in which the draft order is made available to the taxpayer.
· The assessing officer shall pass the order within one month, on the basis of the directions of the panel, without granting any additional opportunity to the taxpayer.
· Rules in relation to the functioning of the panel are to be notified by the Board.
· Appeals in the case of an assessment order which has been subject to the direction of the panel come directly before the tribunal.
The proposed changes relating to introduction of safe harbour rules and a dispute resolution panel are welcome. The constitution of the panel provides taxpayers with the choice of either approaching the panel or the appellate commissioner. This needs some more work and administrative clarity. The Revenue will also have to come up with a strategy for the disposal of the plethora of pending cases lying before the appellate commissioner.
The devil lies in the detail. One will really have to see what is in the final legislation.