Finance ministry may ease transfer pricing norms on capital transactions

The finance ministry is expected to introduce changes in the budget by introducing safe harbour rules for transfer pricing of capital transactions, which will bring about certainty in taxation of such deals.

Reports quoting finance ministry sources say the Budget to be presented by finance minister Arun Jaitley on 10 July will spell out the changes.

The issue of share capital by Indian companies to their parent or group companies has been embroiled in a transfer pricing controversy. Foreign investors are hoping for an early resolution, via suitable amendment in the Finance Bill 2014, which will be tabled next week.

Sources say the ministry is considering 20 per cent mark-up under the safe harbour rule, which would mean that there won't be any tax scrutiny of transactions following the norms.

Absence of safe harbour rules with regard to capital transactions between group companies has led to a lot of transfer pricing disputes while generating much controversy in India, especially involving MNCs such as Vodafone, Shell, WNS and Nokia.

A transfer of shares resulting in capital gains is taxable in the hands of the seller (the Vodafone matter when the buyer was held culpable for non-deduction of tax at source, is another issue altogether). However, issue of new share capital that doesn't result in any income in the hands of the issuing company is considered to be capital in nature and is not taxable.

Sources said the safe harbour provision will be applicable prospectively and the finance ministry believes it will bring down litigation.

Former finance minister P Chidambaram in a reply to Lok Sabha last April had said: ''In financial year 2012-13, 27 cases of undervaluation of share sale by Indian companies to their related parties were detected and subjected to appropriate transfer pricing adjustments, in accordance with the provisions of the Income Tax Act, 1961.''

With the safe harbor provisions, companies can take refuge under the mark-up norms to avoid long-drawn out legal tangle with the government. Under the safe harbour rules, the tax department accepts the transfer price provided by the assessee.