Transfer pricing: Certification move opposed

By K. T. Jagannathan

CHENNAI, MAY 23. It is a classic case of having the cake and eating it too. Or how else can this one move be described?

The draft rules for transfer pricing regulation circulated by the Central Board of Direct Taxes (CBDT) make it compulsory for any company which s entered into international transactions with related parties to get their accounts examined and certified by a chartered accountant under Sec. 92E of the Income tax Act. In doing so, he has to certify that ``the particulars given in the annexure are true and correct.''

This has caused considerable disquiet among the chartered accountant community. According to Mr. Prayaag Joshi, Partner, Arthur Andersen, renowned consulting firm, this could, in effect, mean that the chartered accountant is also forced to certify that the transfer pricing by the company is `true and correct'.

Attaching an independent report by a chartered accountant on all data relating to transactions between related parties is in vogue in developed countries. What has, however, caused consternation in this instance is the insistence on certifying that the particulars given in the annexure `are true and correct'. Ipso facto, this also forces them to certify the transfer pricing.

The powers given to the tax authorities to dispute a transfer price even after an independent report has only forced the chartered accountant community to view the whole exercise with lot more circumspection. ``If we are asked to take the responsibility of certifying the transfer pricing as `true and correct', the authorities should respect our independent view,'' says Mr. Joshi. In an issue like transfer pricing, the parties involved are the company concerned and the tax authorities. A chartered accountant is sought to be involved to lend some objectivity and fairness to the entire exercise, it is pointed out.

Similar transactions need not have the same price. For, the value depends on the utility of any product at varied points for the same individual. This being the case, how could chartered accountants be asked to certify a transfer price as `true and correct'? A view is that even the management of the company should be asked to attest its signature to the report filed by the chartered accountant.

The CBDT-circulated draft rules elaborate on how an arm's length price vis-a-vis an international transaction between related parties should be determined. Basically, they prescribe and discuss five methods - comparable uncontrolled price method, resale price method, cost plus method, profit split method and transactional net margin method.

The draft rules explain how two transactions shall be deemed to be comparable ones and detail the steps to arrive at the most appropriate method for computing transfer pricing. They also list the information and documents needed to be maintained under Sec. 92D of the Income-tax Act by persons entering into global transactions with related parties.

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