1. The long-awaited simplifi-
cation of the Indian income-
tax law has been triggered
by the finance minister’s in-
troduction of the Direct Tax-
COMMENT
Sanjay Tolia
Executive Director (Tax &
Regulatory Practice), PwC
es Code. The Code is to come
into force from April 1, 2010,
to aim at unifying all Indian
direct taxes, and establish-
ing an economically efficient,
effective and equitable direct
tax system that facilitates vol-
untary compliance and min-
imises litigation.
To provide certainty of tax
liability with regard to inter-
national transactions, the fi-
nance ministry has introduced
the concept of Advance Pric-
ing Arrangement (APA). APA
decisions will be valid up to
five consecutive years and will
be binding on the taxpayer as
well as the revenue authori-
ties. APAs will not be bind-
ing in case of changes in
law/facts that form the basis
on which the APA was ini-
tially concluded. Detailed pro-
cedures relating to the appli-
cation process, etc., are yet to
be formulated.
Recent introduction of Safe
Harbour rules and Dispute Res-
olution Panel coupled with the
proposed APA regime are wel-
come moves to achieve cer-
tainty for taxpayers.
As an additional anti-avoid-
ance measure, the Code has
introduced the concept of ‘Im-
permissible avoidance arrange-
ments’ which would serve as
a deterrent against tax base
erosion. Impermissible avoid-
ance arrangements are
arrangements where the main
purpose of the arrangement is
to obtain tax benefits and to
create rights/obligations not
created between people deal-
ing at arm’s length. Such
arrangements may be scruti-
nised with a view to disregard
its “form” and consider the un-
derlying “substance” of the
arrangement for taxation. As
part of such anti-avoidance
measures, certain debt trans-
actions may also be re-char-
acterised as equity in a man-
ner akin to Thin Capitalisation
regulations.
Establishment of econom-
ic and commercial substance
and robust documentation will
be necessary to reduce the like-
lihood of application of such
anti-avoidance measures.
The Code, inter alia, seeks
to widen the criteria for en-
terprises to be con-
sidered as associ-
ated enterprises
by reducing the
threshold share-
holding norm. For
instance, the
shareholding re-
lationship
amongst enter-
prises has
been reduced
from 26 per
cent to 10 per cent. This would
widen the base for transfer
pricing compliance.
The proposed threshold of
10 per cent seems too low for
defining “control”. It may be
prudent to take cognizance of
international tax practices
while finalising the Code.
Further, the Code propos-
es a risk management strat-
egy (not to be revealed to the
taxpayer or to the general pub-
lic) that would be framed by
the revenue for selection of
cases for scrutiny. This risk-
based strategy will replace the
current value-based assess-
ment process.
Also, to support a strong
deterrence programme in a
moderate tax regime, penal-
ties on non-conformance are
sought to be equalised by this
Code. This will result in re-
duction of the penalty inci-
dence. For instance, in case of
failure to maintain documen-
tation, the penalty has been
reduced to a maximum of Rs
2 lakh from a penalty of 2 per
cent of the transaction val-
ue. The upper limit of income
adjustment penalty range has
reduced from 300 per cent
to 200 per cent of tax on ad-
justment.
Implementa-
tion of the above
changes will mark
the maturity of the
transfer pricing
regime in India.
Amendments like
introduction of
APAs, Dispute
Resolution
Panel and ra-
tionalisation of
penalties are sure signs of
an equitable transfer pricing
regime. These measures would
meet the desired results if dis-
cretionary powers under the
anti-avoidance measures are
substituted with objective
guidelines to the revenue.
Also assisted by Shuchi Ray,
senior manager,
PricewaterhouseCoopers
(Views presented herein are
personal and do not
necessarily reflect thosse of
the firm)
TOMORROW: COMPLIANCES
DISPUTE RESOLUTION
Indiatransferpricing:Thenewera
DIRECT TAXES CODEUSTRIES LIMITED
HERI (EAST), MUMBAI- 400093.
tice
e 19th
Annual General Meeting
Thursday, 20th
August, 2009 at
of “The All India Plastic
building, Plot No. A-52, Road
ai-400 093 has been shifted to
of the same building due to
e of the false ceiling at the
For Maxwell Industries Ltd.,
R.Venkataraman
Vice President Finance &
Company Secretary