Transfer Pricing

Expectation from Tax Payer And Role of Department in Alternative Dispute Resolution Mechanism

A Presentation By Ms Anuradha Bhatia DIT(TP)-II, Mumbai.

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

INDEX
Background The Expectation Gap Our Expectation An Overview The Audited Accounts The Report in Form 3CEB Documentation Requirements and Expectation Bridging the Expectations Gap Alternate Dispute Resolution Mechanism

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

BACKGROUND
Transfer pricing (TP) is a subject of relatively recent origin, in the Indian tax regime. The TP law is evolving.
contd...

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

BACKGROUND Increasing globalization, dismantling of trade barriers and the free movement of capital are the change inducing factors Though TP is a limited subject in the tax code, its horizons being global, are much bigger. Conventionally, TP largely impacted foreign grown MNCs, but now, more and more home grown MNCs, as well as close knit/family run businesses like diamond and jewellery are in the TP net.

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

The recent flurry of ITAT TP judgments, indicates the appellate churning out of the law. Its principles will crystallize on an all India basis, in due course of time. The government is sensitive to the dynamic nature of the subject and is open to changes and amendments. TP compliance costs are comparatively high. The government is also sensitive to the TP compliance cost and the fact that even SMEs would tend to be in the TP net, if the threshold bar is not high enough.
contd

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

The limited availability of information in public domain has been a hindrance in TP audits. The volume of TP audits is increasing each year. The Income Tax Department is constantly reviewing the TP law and practices, training its staff and learning its lessons, both in India and abroad. There is a lingering gap, between the expectations of the ITD and the tax payers compliance. The expectation gap needs to be bridged to the satisfaction of both parties.

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

THE EXPECTATION GAP

Assesses need to pay more attention to TP compliances and maintenance of data/records. The flow of even mandatory information and disclosures, from the assesses, have not been free and forthright, at all times. TP conduct has not been satisfactory and information tends to be shared, when snared.
contd

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

There is a general unwillingness to give even routine data, on grounds of confidentiality and secrecy. At times data of even a wholly owned AE is not furnished, citing lack of control over the AE. Even though information is available, direct methods like CUP are avoided and TNMM is preferred.

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

THE EXPECTATION GAP

A detailed and focused effort is needed to explain the assessees business and transactions with AEs, particularly for new age/technology businesses. FAR analysis is often deficient and vague. The list of comparables with the tested party, are cherry picked, and result in a biased statistical jugglery. ARs at times do not take the pains to effectively put forward their cases..BUT cases..BUT

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

THE EXPECTATION GAP We find that based on experience, the assessees, and their ARs, are willing to accept, amend and adapt. There has been a willingness to accept our findings, on the part of the assessees and to rearrange their international transactions.
contd

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

Assessees have modified their TP practices, on the basis of past TP audits. ARs have been willing to put in the efforts, to match our expectations. ARs have kept pace with changes in the law, which is why I have been invited here

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

OUR EXPECTATIONS AN OVERVIEW

The primary expectation of the ITD from the tax payer, are basic and fundamental, as in any other tax administration matter viz. comply with the TP law. maintain the records as stipulated. the data/documents furnished to the ITD must be correct, complete and forthright.

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

suitably explain the TP transactions, with adequate supporting evidence, avoid frivolous litigation and most important. do not arrange your affairs with AEs, such as to deprive India, of its legitimate revenue.

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

THE AUDITED ACCOUNTS

The starting point of any tax scrutiny/audit remains the good old audited accounts. Glaring errors and mismatches have been noted between the audited accounts and TP information, even in cases where the auditors have been the transnational accounting firms. Errors of omission and commission in the accounts and mismatches between the audited accounts and the TP reports, obviously lead to suspicion and breakdown of customary trust and dependence on audited statements.

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

THE REPORT IN FORM 3CEB

Just as the disclosures in the audited accounts have to be true and fair, so is the case of disclosures in Form 3CEB.
contd

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

We thus expect a correct and complete disclosure of information related to the IT of the assesses, with its AEs as prescribed in the said annexure.
contd

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

While the Reports of the accountants in Form 3CEB have been by and large satisfactory, we do notice cases of ::Concealment/incomplete disclosure of information. Non reporting of AEs and transactions with them. Mismatches between Form 3CED and the audited accounts. Misclassification of information. ERRORS AND PARTICULARLY DELIBERATE ONES ERODE THE TRUST BETWEEN US AND THE ASSESSEES.

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

STATUTORY DOCUMENTATION REQUIREMENTS

The main operating data needed by the ITD for the TP audit of assessees, is clearly stated in Rule 10D of the Income Tax Rules, 1962. Strict and complete complaince of information and contemporaneous document is madatory.
contd

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

Unwillingness to furnish information. Such stark unwillingness on the part of assessees portends an attitude to conceal and could be perhaps due to a lack of any punishing penal provision for such non compliance.

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

BRIDGING THE EXPECTATIONS GAP

Since tax administration and enforcement, are strictly within the domain of the prescribed law, its requirements are explicit. So is the case of our expectations in the case of TP. The mandatory requirements of TP documentation and disclosures are clearly laid down by the law. The expectations of the ITD are thus an open secret and in public knowledge.
contd

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

A fair and proper administration of the tax law is a joint effort between the ITD and the assesses. An open, positive and transparent attitude on the part of the assesses, goes a long way in bridging the expectations gap.

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

ALTERNATE DISPUTE RESOLUTION MECHANISM

As the TP law marches ahead, the government is concerned about the rising TP disputes, arising due to increasing cases of adjustments to ALP. The Finance (No. 2) Act, 2009, has thus put in the following amendments ::Safe Harbour rules (Section 92CB) for determining the ALP. The rules would provide the circumstances under which the income tax authorities would automatically accept the TP declared by the assesses. A Dispute Resolution Panel (DRP), (Section 144C) consisting of a collegiums of 3 commissioners of income tax for dealing with complex matters relating to TP or the tax disputes of foreign companies.
contd

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

An alternate dispute resolution mechanism is a prevailing mode in many other countries and as the TP law develops in India, we have also rightfully adopted it.

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

DISPUTE RESOLUTION PANEL AN OVERVIEW

AO to forward a draft of the proposed assessment order to the eligible assessee, if he proposes to make any variation in the income or loss returned, which is prejudicial to the interest of the assessee. Eligible assessee means one in whose case a variation arises as a consequence of the order of the TPO and any foreign company. On receipt of such draft order, the assessee shall within 30 days of its receipt:receipt:contd

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file his acceptance of the variations to the AO or file his objections if any, to such variations with i) the DRP and ii) the AO. DRP means a collegium consisting of three CITs constituted by the CBDT for this purpose. The AO shall pass the assessment order, within one month from the end of the month, in which, the acceptance is received or the period of filing of objections expires. The DRP shall, in a case where objection is received, issue such directions as it thinks fit, for the guidance of the AO, to enable him to complete the assessment.

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

The section prescribes that the DRP shall examine such records and make such enquiry as it thinks fit, before issuing directions to the AO. The DRP may confirm, reduce or enhance the variations proposed in the draft order. It shall however not set aside any proposed variation or issue any direction for further enquiry and passing of the assessment order. In case of any difference of opinion in the DRP, the point will be decided by the opinion of the majority.

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

Every direction of the DRP shall be binding on the AO. No directions shall be issued unless an opportunity of being heard is given to the assessee and to the AO. No direction shall be issued after 9 months from the end of the month in which the draft order was forwarded to the assessee. Upon receipt of the directions, the AO shall complete the assessment in conformity with the directions, without providing any further opportunity to the assessee, within one month from the end of the month in which the direction is received.

TRANSFER PRICING EXPECTATIONS FROM TAX PAYER AND ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

DRP A FEW COMMENTS

The newly inserted section 144C has generated a lot of excitement and interest. It will be a path breaking mechanism in dispute resolution for TP and foreign companies. The Hon. Supreme Court, in the recent case of HCL Technologies Ltd. has approvingly taken note of the DRP and has advised the parties to resort to it. It also directed the competent authority DRP, to not reject the application of the assessee. Suitable directions/action to put section 144C into motion are awaited.

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Thank You Very Much