Hassle free final transfer pricing rules notified

By K. T. Jagannathan

CHENNAI, AUG 23. The Ministry of Finance has come out with the final transfer pricing rules, effecting significant amendments, in the process, to the draft rules issued in May last. Essentially, these changes have sought to address the ambiguities and erase `grey areas' in the draft rules.

A significant change pertains to the deletion of the tie-breaker procedure (in case where more than one method is applicable) prescribed by the draft rules for adopting the most appropriate method for arriving at a transfer price. The draft rules have said that comparable uncontrolled price method, resale price method and the cost plus method are `more appropriate' than the profit split method or transactional net margin method.

This provision has now been deleted in the final rules, giving a tax payer leeway to select the most appropriate methodology he deems it fit. The rules now provide definitions for `uncontrolled transaction', `property' , `services' and `transactions'. Industry sources, however, feel that the final versions have not addressed issues concerning cost contribution/ allocation/apportionment.

The final rules have also made the documentation needs simpler. The final version says that `a record of economic and market analysis, forecasts, budgets or any other financial estimate is required to be maintained only so far as they may have a bearing on the international transactions''. Further, the final rules say study reports and technical publications will be acceptable as `supportive documentation'.

Significant changes have also been made in rules relating to application of methods. The rules relating to resale price method have now been expanded to include services and intangibles as well. The draft rules did not define `normal profit margins' in this case, leaving scope for ambiguity. The final rules, however, talks of the `normal gross profit margin' as the one in line with the international practice . The amended rules permit adjustments to the price to normalise for differences in accounting practices between the international and comparable transactions.

In the cost plus method, the final rules say both the direct and indirect costs should be considered.

The final rules have also extended the application of profit split method to cover transactions involving transfer of unique intangibles (apart from multiple inter-related transactions).

The final rules also take into account the concerns voiced by the industry. The final versions take note of government regulations, their impact on prices and consequently on its bearing on arriving at a transfer price. The `laws and government order' are given importance in judging comparability in the final rules.

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Section  : Business
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