Transfer Pricing in India

Transfer Pricing Disputes in India: Case studies

Transfer pricing refers to the practice of determining the price at which transactions between related parties should occur. It is an important aspect of multinational corporations (MNCs) as it helps to allocate profits and costs among the different entities within the company. Transfer pricing is also crucial for tax purposes, as it determines how much tax MNCs should pay in each country where they operate.
India has been actively regulating transfer pricing since 2001, with the introduction of the Transfer Pricing Regulations. Since then, the Indian government has been closely monitoring and scrutinizing transfer pricing transactions, leading to several transfer pricing disputes with MNCs operating in the country.

Transfer Pricing Regulations in India

Historical Overview:

• India introduced transfer pricing regulations in 2001 as part of the Finance Act, 2001^[1].
• The regulations were aligned with the arm’s length principle of the OECD Transfer Pricing Guidelines.
• In 2012, India introduced a Safe Harbor regime to provide certainty to taxpayers on transfer pricing transactions.

Current Legal Framework:

• Transfer Pricing Regulations in India are governed by the Income Tax Act, 1961 and the Income Tax Rules, 1962.
• The Central Board of Direct Taxes (CBDT) issues guidelines and instructions to consistently apply transfer pricing regulations.
• In 2017, India adopted the base erosion and profit shifting (BEPS) framework, which introduced measures to combat aggressive tax planning by MNCs.

Transfer Pricing Methods:

• Comparable Uncontrolled Price (CUP) Method: compares the price of a controlled transaction with the price of an uncontrolled transaction.
• Resale Price Method (RPM): determines the price at which a product is sold to an unrelated party, and applies an appropriate markup to determine the arm’s length price of a controlled transaction.
• Cost Plus Method (CPM): determines the cost incurred by the seller in producing the product and adds an appropriate markup to arrive at the arm’s length price of a controlled transaction.
• Profit Split Method (PSM): allocates profits between related parties based on the relative value of contributions made by each party.
• Transactional Net Margin Method (TNMM): compares the net profit margin of a controlled transaction with the net profit margin of an uncontrolled transaction.

Transfer Pricing Disputes in India: Case Studies

1. Vodafone:

• Vodafone was involved in a transfer pricing dispute with the Indian government over its acquisition of Hutchison Essar in 2007.
• The Indian tax authorities argued that Vodafone had failed to deduct tax at source on the payment made to Hutchison Essar’s shareholders.
• Vodafone argued that the transaction was structured offshore and was therefore not subject to Indian tax.
• The dispute was ultimately settled in 2012, with Vodafone agreeing to pay $2.2 billion in taxes and penalties.

2. Shell:

• Shell India was involved in a transfer pricing dispute with the Indian tax authorities over a share transfer pricing issue in 2012.
• The Indian tax authorities alleged that Shell India had undervalued shares transferred to its parent company and therefore evaded taxes.
• Shell India challenged the allegations in court and the case is still pending.

3. Nokia:

• Nokia was involved in a transfer pricing dispute with the Indian tax authorities over royalty payments made to its parent company in Finland.
• The Indian tax authorities argued that Nokia had underreported income and evaded taxes by claiming excessive deductions.
• Nokia challenged the allegations in court and the case was settled in 2013, with Nokia agreeing to pay $571 million in taxes and penalties.

4. Coca Cola:

• In 2019, Coca Cola India was involved in a transfer pricing dispute with the Indian tax authority over the valuation of its brand.
• The tax authority claimed that the brand value was higher than what Coca Cola India had declared, resulting in a lower tax liability for the company.
• Coca Cola India challenged the tax assessment, and the case is currently ongoing.

5. IBM:

• In 2018, IBM India was involved in a transfer pricing dispute with the Indian tax authority over the share buyback transaction between its parent company in the US and its subsidiary in India.
• The tax authority claimed that the transaction was undervalued, resulting in a lower tax liability for IBM India.
• IBM India challenged the tax assessment, and the case was settled in 2020 with IBM India agreeing to pay a tax liability of $400 million.

Best Practices for Multinational Corporations

1. Documentation Requirements:

• Maintain proper documentation of transfer pricing policies, methodologies, and calculations.
• Keep records of comparable transactions and adjustments made to account for any differences between the controlled and uncontrolled transactions.
• Ensure that the documentation is updated regularly to reflect changes in business operations and market conditions.

2. Arm’s Length Principle:

• Follow the arm’s length principle while determining the price of controlled transactions.
• Conduct a detailed benchmarking analysis to identify comparable transactions and adjust for any differences between the controlled and uncontrolled transactions.
• Use multiple transfer pricing methods to arrive at a reliable arm’s length price.

3. Advance Pricing Agreements (APAs):

• Enter into APAs with the Indian tax authority to mitigate transfer pricing risks and uncertainty.
• APAs provide certainty on the transfer pricing methodology and pricing for a specified period of time.
• APAs can be unilateral, bilateral, or multilateral, depending on the number of tax jurisdictions involved.

4. Compliance and Reporting:

• Comply with all transfer pricing regulations and reporting requirements in India.
• Ensure that all related party transactions are properly disclosed in tax returns and financial statements.
• File accurate and timely transfer pricing documentation with the Indian tax authority.

5. Dispute Resolution Mechanisms:

• Establish effective dispute resolution mechanisms to minimize the risk of transfer pricing disputes.
• Explore alternative dispute resolution mechanisms such as mutual agreement procedures, arbitration, and mediation.
• Engage with the Indian tax authority in a collaborative and transparent manner to resolve disputes.

Conclusion

Transfer pricing is an important issue for multinational corporations operating in India. With a robust legal framework and an active tax authority, transfer pricing disputes in India have been on the rise. Multinational corporations must adhere to the arm’s length principle and maintain accurate documentation of transfer pricing policies to avoid any potential disputes. Advance pricing agreements can provide certainty and mitigate transfer pricing risks. Compliance with reporting requirements is critical, and effective dispute resolution mechanisms can help resolve disputes in a collaborative and transparent manner. By following best practices, multinational corporations can minimize the risk of transfer pricing disputes and operate with certainty in India.

Also Read:
Transfer Pricing Documentation and compliances
An Overview of Top Concerns on Transfer Pricing
Some Important Transfer Pricing Case Laws in International Taxation