Domestic transfer pricing leeway provides a loophole for Indian companies
Even as the government removed an irritant of domestic transfer pricing, industry trackers said this could lead to some companies exploiting it as a loophole.
The government said transfer pricing won’t apply in the case of transactions among group companies. It will only apply in a case where one of the entities involved in related party transaction enjoys a tax break.
“Domestic transactions between two Indian related parties have been exempted from transfer pricing provisions except in the case of companies which claim specified tax holidays. This reduces a significant burden on domestic transfer pricing compliance and also means that domestic transactions need not be entered into at arm’s length,” said Rajesh H Gandhi, partner, Deloitte Haskins & Sells.
Arm’s length pricing is basically a price the seller will fetch for goods or services in an open market and the rate charged by other sellers (plus-minus 5 per cent).
Until now, many companies were worried that the tax department could trigger transfer pricing adjustments even in domestic situations. Going ahead there will be no deterrent for a company to indulge in transactions with related parties where prices may be too high or too low to suit the company’s tax stance.
There was a worry that going ahead, especially with several new regulations coming in, domestic transfer pricing could lead to a lot of litigation.