Sunday, Dec 21, 2003
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By Our Special Correspondent
(Transfer pricing is a business practice used by affiliated companies to take advantage of differing tax rates in different countries. On transfers between the affiliates, a high price is charged to the affiliate in the high tax state so that it will have a small profit; and a low price is charged to the affiliate in the low tax state so that it will have a large profit. The result for the worldwide operation is a net tax savings.) Participating in an interaction meeting with the Madras Chamber of Commerce and Industry (MCCI) here on Wednesday, Mr. Mathur said that in an overwhelming majority of cases taken up for scrutiny by the Transfer Pricing Cell of the department, the assessees had chosen to apply the Transactional Net Margin Method (TNMM) to arrive at the "arm's length price" in international transactions, though this was supposed to be the "last resort" among the methods available for this purpose. In a majority of the cases, clearly one or another of the other methods prescribed by law — the comparable uncontrolled price method (CUPM), resale price method (RPM) — cost plus method (CPM) or the profit split method (PSM) -- would have been the most appropriate method to arrive at the arm's length price. Purported non-availability of the rate of gross profit (which companies are not bound to disclose under the generally accepted accounting practices or GAAP in India) could not be an excuse (for consultants/tax advisers) because the figure could otherwise be calculated roughly, he said. The failure to apply the right method in the documentation would defeat the intentions of the legislature which, in the Finance Act of 2001, brought into being sections in the Act and corresponding rules to implement the concept of monitoring transfer pricing in international transactions (arising mostly in the case of multinational enterprises). Pointing out that India had adopted the OECD model on transfer pricing regulations, Mr. Mathur said many Japanese companies operating in the U.S. were accused of shifting their US profits to their domestic (namely, Japanese) operations, though the tax rates in Japan were higher compared to the US. "I cannot think of any reason for this, except perhaps, patriotism", he said, apparently contrasting the tendency of companies elsewhere to shift their income to countries having low levels of tax through transfer pricing. Mr. Mathur said the emerging issues in international taxation included the operation of BPOs (business process outsourcing units), import of software and bandwidth. The report of the official task force on these issues was still "under wraps". The DG said though the Supreme Court had upheld as legal what had been considered "treaty shopping" by way of use of the India-Mauritius double taxation avoidance agreement (DTAA) by shell companies set up in Mauritius, the operation of the treaty seemed to have the effect of "nullifying" provisions of DTAAs signed by India with many other countries. Members of the chamber pointed out that with the increasing instances of Indian companies too being involved in acquisitions and mergers abroad and operating internationally, the issue of transfer pricing was assuming greater importance.
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