By TIOL News Service

NEW DELHI, JULY 10, 2014: PARTLY living up to its manifesto promise of overhauling tax dispute resolution mechanisms, Finance Minister Arun Jaitley in his maiden budget, has proposed key changes in Transfer Pricing regulations, designed to reduce litigation in direct taxes. These changes relate to introduction of a ‘Roll back’ provision in the Advance Pricing Agreement scheme and strengthening its administrative set up besides introducing a range concept for determination of the arm’s length price and use of multiple year data.

Under the APA scheme, an agreement between the taxpayer and the tax authority may be concluded on the pricing of future inter-company transactions, the transfer pricing methodology to be applied and its application for a certain future period of time for covered transactions. The Roll Back provision would allow an APA entered into for future transactions to also be applied to international transactions undertaken in the previous four years under specific circumstances.

In a bid to overhaul the dispute resolution mechanisms, the Finance Minister has also promised to strengthen the administrative set up of the APA scheme, introduced in year 2012.

Budget 2014 in an attempt to align transfer pricing regulation with the best available practices, also proposes to introduce the range concept for determination of the arm’s length price. However, the arithmetic mean concept would continue to apply where the number of comparables is inadequate. Appropriate rules will soon be prescribed.

Another major area of transfer pricing dispute between an assessee and the Transfer Pricing Officer is the use of multiple year data, favoured by the assessee as against current year data, preferred by the TPO. As per existing provisions of Transfer Pricing Regulations, only one year data is allowed to be used for comparable analysis with some exception. These rules will soon be amended to allow the use of multiple year data.

The scope of the Authority for Advance Rulings, currently limited to non-residents, will now be extended to resident taxpayers too. This amendment will enable resident taxpayers to obtain an advance ruling in respect of their income tax liability above a defined threshold. Additional benches are also proposed to be constituted to strengthen the Authority of Advance Rulings. The scheme of Advance Ruling in indirect taxes is also being expanded to cover resident private limited companies, that can now seek advance ruling in respect of new activities being proposed to be undertaken by them.

The scope of the Income Tax Settlement Commission will be expanded to facilitate quick dispute resolution. Necessary legislative amendments to give effect to these proposals including those relating to the Authority for Advance Rulings and Income-tax Settlement Commission will be moved in the current session of the Parliament.

The Finance Minister has also proposed to set-up a high level committee to interact with trade and industry on a regular basis and ascertain areas where clarity in tax laws is required.

Transfer Pricing is a major area of litigation for both resident and nonresident taxpayers. These are long pending urgent dispute resolution measures considering a tax demand of more than Rs. four lakh crore currently under dispute and litigation before various Courts and Appellate authorities.