FM takes transfer pricing route to rake in the moolah

With the government scrambling for funds to fill the huge gaps in its finances, the income tax department seems to be training its guns on foreign companies in India over transfer pricing issues.

According to a report in the Economic Times yesterday, Vodafone is the latest that has caught the tax authorities’ attention.

[caption id=“attachment_617596” align=“alignleft” width=“380”] In tax row. Reuters[/caption]

The department has alleged that Vodafone India, the local arm of the UK telecom major, under-priced by nearly Rs 1,300 crore its shares issued to a group company based in Mauritius, the report says.

It has to be remembered that Vodafone has not yet resolved its earlier tiff with tax authorities over the retrospective taxation of its deal with Hutchison, where the Hong Kong based company sold its stake in Hutchison Essar to the UK firm.

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According to the ET report today, the tax department has said that Vodafone India’s shares should be valued Rs 50,000 per share as against the company’s Rs 8,000 per share.

The authorities have found fault with the company’s methodology to arrive at the valuation.

Just two days ago, the IT department had alleged global energy giant Shell Gas BV’s Indian arm of underpricing its shares by Rs 15,000 crore while transferring shares to the parent.

Earlier, BusinessLine reported that an income tax department team investigating possible tax violations by handset maker Nokia had expressed doubts that the company may have flouted transfer pricing rules.

Arm’s length and India’s chances

Transfer pricing refers to pricing of transactions (involving transfer of goods or services) between companies that are related to each other. In most of the cases, prices of goods and services transferred in this way are decided arbitrarily in order to evade tax.

In order to check such arbitrary pricing, the law mandates an “arm’s length price” mechanism, which “means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions”.

According to a survey conducted by Ernst & Young in 2012, globally “a broad consensus exists with respect to the arm’s-length principle and its application”.

In India, the increase in number of such transfer pricing cases is mainly because of the difference of opinion between the tax authorities and the companies about the methodology used to arrive at the prices.

Under pressure from the government to meet tax collection targets, Indian tax officials are going after foreign companies. At stake is a large amount of money, it they succeed in making the companies pay.

According to a report in the Economic Times today, the government’s aim is to collect as much as Rs 1 lakh crore from foreign companies by applying transfer pricing. For this year, the target is Rs 44,000 crore, it said.

In the last two years, India has even started taxing “marketing intangibles” – the expenditure incurred by the parent company to boost the brand equity in India. This has been contested by both the companies and tax experts, the report said.

Though the government seems to be adamant on getting the money, it may not be that easy.

Shell and Vodafone have already said that they will approach the court against the orders they have received. If this happens, a long and protracted legal battle is likely.

Moreover, multinational companies have issued statements that can potentially hit India where it hurts the most.

“Taxing the money received by Shell India is, in effect, a tax on foreign direct investment, which is contrary not only to law but also to the spirit of the recent global trip by the finance minister,” Shell India chairman Yasmine Hilton was quoted as saying in a Firstpost report.

Given the hunger for foreign capital, willthe government give in? If it indeed does, it will be a repeat of GAAR where the finance minister sacrificed long-term benefits for short-term gains.