JULY 16, 2014

By Shuchi Ray & Nimisha Parikh, Deloitte Touche Tohmatsu India Pvt Ltd

THE Union Budget 2014-15 has provided much required relief to taxpayers who are subject to comply with Indian transfer pricing (‘TP') regulations. The significant TP proposals propounded in this budget inter-alia include roll back of Advanced Pricing Agreements, use of multiple year data, introduction of range concept and rationalization of definition of the term ‘international transaction'. These amendments are likely to have far reaching impact on the manner in which TP provisions are typically interpreted and implemented in India. While the proposals are largely dealing with fundamental rudimentary of TP, they shall go a long way in aligning Indian TP with the internationally accepted TP standards. This article aims to throw light on the multiple year data proposal read in close consonance with the Companies Act, 2013.

Under the existing Indian TP regulations, owing to unavailability of relevant period's data (i.e. year in which the related party transaction was entered into), taxpayers have always faced a dilemma as regards the manner of complying with the contemporaneous documentation requirement. In such situations, taxpayers typically have to use multiple year data for preparing the TP documentation since relevant single year data is unavailable.

Thereafter, at the time of the TP audit, the taxpayer is asked to update the benchmarking analysis (as on the date of the audit) using single year data. As one would logically appreciate, this futuristic data would never be available to the taxpayer at the time of preparation of documentation. This has led to long drawn litigation, especially in cases where significant variance in margins have been determined by the tax authorities.

The Hon'ble Finance Minister, in his budget speech, introduced the proposal to amend the regulations and allow use of multiple year data for comparability analysis . Currently, the number of years to be considered for comparability analysis has not been defined. Accordingly, to examine the practical impact of the proposal on the tax landscape and the precise manner in which it would be implemented, one would have to wait for the rules to be notified. It is earnestly hoped that once multiple year data starts getting accepted by the tax authorities, it would result in lesser disputes at the audit stage itself. This, in turn, would lead to lesser TP adjustments and consequential litigation.

The said measure is a vital step towards aligning Indian TP regulations with internationally accepted practices. The use of multiple year data is a well-recognized concept internationally, and is strongly recommended by Organisation for Economic Co-operation and Development (‘OECD'). Similar provisions exist in countries like USA, Australia, China, United Kingdom, etc. Accordingly, by allowing the use of multiple year data, the Indian TP regime is following global foot prints in this direction, thus lending requisite certainty to taxpayers.

In this context, it would be interesting to note that apart from alignment with global best practices, the proposal to use multiple year data also establishes requisite sync with the Companies Act, 2013 (2013 Act). The recently introduced 2013 Act has laid down a procedure for entering into transactions with related parties. As per the same, companies are required to determine the arm's length nature of the said related party transactions (‘RPT') to the satisfaction of the audit committee. They may also be required to obtain requisite approval of Board / Shareholders' prior to entering into an RPT in situations where the transaction is not at arm's length or not in the ordinary course of business. The term ‘arm's length transaction', as defined under 2013 Act means “a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.” However, there is no specific guidance provided in 2013 Act vis-à-vis interpretation of the term ‘arm's length transaction'. Nonetheless, keeping in perspective the objective of 2013 Act (which is to protect the interest of the company and its shareholders and enhance self-regulation), companies are expected to ensure that there is no prejudice to shareholders of either of the parties to the transaction and that such transactions do not result in misstatement of accounts.

To achieve the said objective for RPT, one may rely upon the methodologies prescribed under Indian TP regulations or the international TP guidelines in this regard. The 2013 Act requires the approval for RPT at the time of entering into a transaction. While planning a transfer price, important factors (i.e. economic and business conditions, contract cycles, pricing trends, etc.) are generally analysed by usage of data ranging over a period of at least 2-3 years. Further, this may vary based on the product and industry under consideration. Hence, use of such multiple year data for price fixation purposes will help companies in complying with 2013 Act requirements as well. Thus, in a nutshell, the introduction of multiple year data concept would be a step towards harmonisation between Indian TP regulations and corporate law requirements. Goes without saying, the end result would be a consistent approach towards planning, compliance and defence for inter-company transactions.

In view of the foregoing, it can be concluded that introduction of multiple year data concept will not only help taxpayers mitigate (or if not mitigate, at least minimise) TP adjustments and consequential litigation, it would also help in aligning Indian TP regulations with the globally accepted best practices. Further, it would also somewhere help the convergence of Indian TP principles with 2013 Act requirements.