Technical Update from India

Facility to keep in abeyance collection of outstanding taxes under MAP now extended to Indian residents

The government of India has extended the facility of suspension of disputed tax demand both for US and Indian residents.

This would result in Indian revenue authorities taking cognisance of MAP filed by US affiliate of the Indian assesses, while keeping in abeyance the collection of tax demands especially those arising from transfer pricing adjustments.

As per CBDT instruction, on receipt of request from an Indian or US resident, the Assessing Officers are required to keep the collection of outstanding taxes in abeyance after confirming the pendency of MAP from CBDT and an adequate bank guarantee from the applicant.

Losses on account of Indian government’s price regulations cannot result in arranged transaction to invoke transfer pricing provisions

An Indian company engaged in importing drugs from a German parent incurred losses after the drug’s sale prices were fixed at lower level by the Indian government under the Drugs Price Control Order. The assessing officer (AO) disallowed the loss, stating it was as a result of business arrangement between the two companies.

On appeal, the Appellate Commissioner deleted the additions made by the AO. On further appeal by Revenue, the Mumbai tribunal recently held that the sale of drugs resulted in a loss because of the Indian Government’s price regulations and the transaction between the two companies were not an arranged transaction and special provisions relating to avoidance of tax for disallowing loss cannot be invoked.

Contributed by Rohan Phatarphekar (rohankp@kpmg.com and A.Pradeep (pradeepa@kpmg.com) - KPMG India.

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