Money Matters - Simplified

New ‘safe harbour’ rules to curb transfer pricing disputes

The Indian government has announced draft safe harbor rules under which income-tax authorities will not question the pricing of related party transactions.

As a part of the draft safe harbor rules announced Wednesday, the Indian government gave conditional exemption to multinational corporation’s transactions with their Indian setups from being quizzed on concealment of tax.

The new strictures come in the wake of rising instances of taxation related disputes with MNCs. The draft rules are likely to reduce such litigation with foreign companies.

Aim to Reduce Litigation
'Safe Harbour' refers to instances where the income-tax authorities will agree to the transfer price declared by the assessee and will not get into further investigations.

"These rules will provider certainty...The idea is to ensure there is less litigation," said revenue secretary Sumit Bose.

In recent times, companies like Shell and Vodafone were slapped legal notices by taxation authorities. The authorities alleged that these multinationals undervalued the sale of shares in cross-border transactions.
The issue of transfer pricing has hogged the limelight ever since.

Many Industries Covered
The draft rules reportedly cover 10 specified types of transactions.

Many industries, including the IT, pharmaceutical and auto ancillaries sectors, will benefit from these rules. The rules will apply in case the transaction or loan value is between Rs 50 crore and Rs 100 crore.

Vijay Iyer, Partner & National Leader (Transfer Pricing) with Earnest & Young aver, felt that the exclusion of companies with turnover in excess of Rs 100 crore, would limit the number of takers for the safe harbour.

“Further, the high safe harbour for auto components and corporate guarantees may dampen the acceptability of the safe harbour,” he added.

The government has sought feedback on these rules from all stakeholders till August 26. After that these rules, which are based on the recommendations of the N Rangachary committee set up by Prime Minister Manmohan Singh, will be notified and will be effective for the financial year 2013-14.