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KPMG India calls for new transfer pricing guidelines

TP Week correspondent backs comprehensive changes to the transfer pricing rules in pre-Budget submission

KPMG in India has called for comprehensive changes to India’s transfer pricing rules in its submission to the union government ahead of the national budget presentation on February 28. In general terms, the firm says that the government needs to introduce a set of guidelines for several transfer pricing issues. “There have been consistent inconsistencies in the interpretation and application of the transfer pricing regulations by authorities across India,” the practice comments.

It points to multiple inconsistencies in the interpretation and application of the transfer pricing regulations, including selection of comparable data, multiple year data, intra-group services and cost contribution arrangements. KPMG says: “Given that the transfer pricing law in India is now in existence for over five years, it is necessary to frame detailed guidelines that would provide recommendations on various practical issues in transfer pricing faced by the taxpayers.”

It calls for the introduction of advanced pricing agreements (APAs) and safe harbour rules. “The approach followed by revenue authorities during the course of transfer pricing assessments is arbitrary and inconsistent. This has led to genuine hardships to various taxpayers across the country. Taxpayers continue to go through the administrative burden of having to go through a fact-intensive application of the arm’s length principle with due application of judgment."

KPMG also wants the government to introduce measures to ensure that the approach of transfer pricing officers in the revenue authorities is standardised. In addition, the firm wants an upper ceiling for penalties based on the tax owed.

“Further, it is also proposed that the taxpayer should not be penalised twice for the same mistake. In a case where the taxpayer has not maintained the prescribed documentation, there should not be further penalty of 2% for failure to supply,” the practice says.

It adds: “There continues to be a lack of consistency between customs valuation procedure and transfer pricing regulation under Act. In fact, both departments work at divergent purposes. The customs department tends to consider valuation of material and try to load more assessable value whereas the income tax department is likely to consider that such assessable value is excessive and disallow that part as deemed to be excessive.

“A suitable method for valuation of imported goods should be established which is acceptable to both customs law and the Act. This can be done by means of specific guidelines or a circular that, wherever customs have accepted the valuation of the imported goods under the valuation procedure same, it will be considered to be satisfying arm’s length principle under the Act.”

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