India looks to relax transfer pricing rules

Amendments to the Income Tax Act 2009 are to be finalised in an attempt to reduce tax litigation with multinational IT companies


The Indian government, in a bid to reduce the number of transfer pricing audits and the subsequent legal proceedings against multinational corporations that then follow them; have decided to adopt new safe harbour provisions, which will be added to existing tax legislation.

The new rules are designed to limit the country’s tax authority’s regulatory powers, allowing them to accept transfer pricing quotes between foreign subsidiaries and their domestic parent company without the need for further investigation, as long as underlying measures are adhered to.

At a press conference India’s revenue secretary, Sumit Bose , “Provision for safe harbour has been inserted in the Income Tax Act, 2009. Draft safe harbour rules and the recommendations of Rangachari committee are available on the revenue department website.”

The Central Board of Direct Taxes (CBDT), which is overseen by the country’s Ministry of Finance, has identified particular sectors where the new safe harbour provisions will be applied, which are as follows: IT, ITES, contract R&D in IT and pharmaceuticals, auto ancillaries-original equipment manufacturers and financial transactions to both outbound loans and corporate guarantees.

Various stakeholders have been asked for their input regarding the new provision by including several industry-related government departments, such as NASSCOM, CII, FICCI, ASSOCHAM, ICAI.

Reports have now been drafted on the basis of such recommendations and the Indian government has stated it will continue to consider stakeholders comments for possible amendments up until August 26, after which the new rules will be finalised.

If the rules go unchanged the draft states that software companies engaged in development services other than contract R&D, where the total value of international transaction does not exceed Rs 100 crore, and as if operating profit margin declared in relation to operating expense incurred is 20 percent or more such companies will see no further scrutiny from tax authorities.

The draft also states that information technology enabled services, other than contract R&D where the total value of international transaction does not exceed Rs.100 crore, the safe harbour rules will apply as long as the operating profit margin declared in relation to operating expense is 30 percent or more.