Realistic enforcement needed

NEW DELHI DEC. 25. The Associated Chambers of Commerce and Industry of India (Assocham) has cautioned the Government against the application of arms length principle for the transaction of purchase and sales between the associated enterprises disregarding practical situations that would work to the disadvantage of Indian entities.

As such, it has suggested that the transaction of export sales to non-resident associated enterprise should not be covered under the Transfer Pricing Regulations.

Pointing out that there were many situations where the non-resident associated enterprises help Indian companies to promote and establish export market and that the government itself was giving a number of incentives to promote exports, it said that prices of Indian entities were not competitive. Further, many of the associated enterprises were large MNCs having global presence and capable of creating markets for their Indian affiliates.

The Transfer Pricing Regulations are also applicable to purchase and sale of intangibles between the associated enterprises.

Since there may not be comparable transaction in respect of the intangibles such as royalty, technical service fees, fees for use of licence, trademarks and the like it will be difficult to arrive at the arms length price on the basis of the valuation methods prescribed. Further, as valuation of intangibles is subjective and depends on various factors affecting a particular transaction and the associated enterprises, it will be proper that the board lays down specific guidelines, in respect of valuation of intangibles.

Referring to the confidentiality of international transactions, the industry body feels that sufficient information and necessary documentation in respect of international transaction are to be maintained. Further, they are to be furnished to the assessing officer when required by them and needs confidentiality of information for the survival of business.

A provision ought to be made in the law whereby such important information/details after examination, verification and authentication by the tax officer may be allowed to be retained by the assessee.

Also the penalty of two per cent of the value of the international transaction for failure to maintain and furnish any such information and documents as required under the law is too harsh as the quantum of penalty will be too high in terms of the value of international transaction and should be liberalised. It should be substantially reduced to say not more than 0.25 per cent of the transaction value or at a percentage of tax payable or, in an alternative, a small absolute amount.