The Hindu Business Line : Ministry may improve selection criteria for transfer pricing audits

Assessment
The income-tax department has completed transfer-pricing audits for two years - assessment year 2002-03 and 2003-04 — and made total transfer pricing adjustments of about Rs 2,800 crore.

New Delhi , Aug 31

The Finance Ministry may become more scientific in selecting cases for transfer pricing audits. Currently, cross-border transactions of more than Rs 15 crore in a year between related-parties are taken up for compulsory scrutiny by the tax department.

Improve norms

Indications are that the revenue department may go in for some qualitative trigger norms in addition to the existing quantitative criterion for deciding on the cases for transfer pricing audits.

According to Mr B.M. Singh, Director-General, International Tax, the trigger for transfer pricing audit in the future could, for instance, be transactions with tax heavens or when enterprises show high sales and low profits from year to year.

"We may try to get more scientific. We are trying to get there", he told an industry gathering while being non-committal on when the qualitative norms for trigger of such audits would be introduced.

The Finance Ministry had recently hiked the threshold limit for compulsory scrutiny of cross border transactions for transfer pricing audit purposes from Rs 5 crore to Rs 15 crore.

Secret comparables

On the department's stand on use of secret comparables in transfer pricing audits, Mr Singh said that this was an accepted practice even though he felt that this should be used as the last resort.

The practice of secret comparables is not prevalent in all countries.

Secret comparables are basically benchmarks or information on comparable transactions obtained by the tax authorities from another taxpayer or source to be used during the transfer-pricing audit of a particular taxpayer.

So far, the income-tax department has completed transfer-pricing audits for two years - assessment year 2002-03 and 2003-04 - and made total transfer pricing adjustments of about Rs 2,800 crore.

Meanwhile, Mr Singh also said that the time is not ripe for introduction of advance pricing arrangements (APA) for transfer pricing purposes. APAs are in the nature of advance rulings that gives comfort on the pricing front to enterprises undertaking international transactions with associated enterprises.

Mr Samir Gandhi, Tax Partner, Deloitte Haskins and Sells, suggested that the customs valuation accepted by special valuation branch should be "persuasive value" for acceptance as arm's length pricing by the transfer pricing officer (TPO) in case of tangible goods. He also underscored the need for `safe harbour' provisions on services.