Finance Ministry to tune transfer pricing laws

New Delhi, Sept 22: In order to prevent erosion of taxes by Multi National Companies operating in India, the Finance Ministry is considering modifications and fine tuning of provisions on Transfer Pricing even as it expects to audit more companies this year, Revenue Secretary in Finance Ministry K M Chandrasekhar said today.

''Commercial transactions between related parties of a multinational group may not be subject to the same market forces that shape the relations between two independent firms. This makes the implementation of transfer pricing regulations challenging and calls for certain modifications in the provisions,'' he told reporters here.

The issue of transfer pricing arises in case where two related parties, for example a subsidiary and parent company, established in different countries transfer goods and services at arbitrary prices which has no relationship whatsoever with cost or the value added.

This mechanism shifts profits from subsidiaries domiciled in high tax jurisdictions to a parent in low tax jurisdiction or vice versa and hence leads to the erosion of tax base of one or more tax jurisdictions.

''Though India had formulated the regulations in this regard in 2001, which came into effect in 2002, yet we are in a nascent stage and require to make it more effective through fine tuning them in view of growing activities in the economy,'' the secretary said.

One of the major challenges in the implementation of transfer pricing regulations is the non-availability of a reliable data base which offers suitable comparables with regard to cross border transactions, he said.

''Another challenge is with regard to the determination of arm's length price of intengibles and that of cost contributory arrangements between the related companies,'' he added.

Arm's length price is a rate at which a company sells goods, services and intangibles to an unrelated firm.

These distortions in country's taxation laws are under consideration of the finance ministry which will soon find the solutions for them, Mr Chandrasekhar assured the industry delegates.

He informed reporters that the finance ministry has made transfer pricing adjustments in transactions of Rs 3,500 crore in the first two years of its operation.

According to him, in 2004-05, out of 1000 cases audited by the Transfer Pricing Officers (TPOs) adjustments in transactions of about 250 cases were made that led to addition in income to the total of Rs 1,200 crore.

In the year 2005-06, the TPOs audited about 1,500 cases and adjusted prices in about 350 cases resulting in addition of Rs 2,300 crore.

The ministry expects to audit the transaction of more companies this year, he added.

UNI