Transfer Pricing Litigation in India
Affiliated Enterprises status in India can depend on the presence of loans or the presence of equity. Equity holdings of “at least 26 percent” cause the relationship to constitute affiliated status. Control is determined through the composition of the board of directors. Affiliated Enterprise status in India applies because of financial control: providing loans equal to 51 percent of the assets or providing guarantees equal to 10 percent of total borrowings. Affiliated Enterprises status in India can result thorough dependence based on intangibles: Dependence based on patents, on licenses; or on business or commercial rights. Affiliated Enterprises in India can result through a franchisor / franchisee relationship.
The transfer pricing method selection criteria in India is based on “the Most Appropriate Method” or MAM. The “Accountant’s Report” plays a significant role in India. Two separate governmental parties play a role in a transfer pricing audit in India, the Assessing Officer (AO) and the Transfer Pricing Officer (TPO).
India imposes severe transfer pricing penalties - a minimum of 100 percent of the transfer pricing adjustment. Penalties for a transfer pricing adjustment can be a maximum of 300 percent of the transfer pricing adjustment.
The taxpayer can appeal before the Commissioner of Income Tax (Appeals), CIT(A). Appeals can go to the Income Tax Appellate Tribunal (ITAT). Then appeals can go to the High Court if the issue is based on the legal issues rather than on facts.
India does not accept the concepts of advance pricing agreements (APA);
Nevertheless, the Authority for Advance Ruling might serve in essence as a unilateral APA but for the fact that the AAR process does not include valuation issues in its purview.
A non-Indian company doing business in India is well-advised to examine four facets of the permanent establishment process in India:
- the presence of direct business activities,
- the presence of agency relationships,
- the presence of more-than-stewardship activities, and
- the presence of personnel shifts from the parent company to the subsidiary.
