Transfer pricing methodology of MNCs under customs department lens

The days for information arbitration may just be over for many companies.

The special valuation branch of the customs department is scrutinising transfer pricing methodologies of several multinationals with a view to reconcile their tax and import-expert submissions.

Up until now, the MNCs used to file separate transfer pricing positions to both departments, one for taxation purpose and other for international trade. Since the two departments wouldn’t share data or information with each other, companies could get away with the information arbitrage in some cases said insiders.

Transfer price is basically a price charged by a subsidiary or a division of a company to another. The rules suggest that there has to be an ‘arm’s length’ while fixing this price so that it’s not too low or too high than the existing open market prices. Tax officers can question and demand tax in case they suspect that companies are escaping taxes.

The customs department too has its own valuation mechanism whereby it checks the price of the imports and exports to subsidiaries outside India.

“Collaboration between customs and income tax department was initiated few years ago, it’s only recently that we have seen that data and information provided by businesses to one is being used by the other more frequently. While the objectives of both the departments could be different, there could be disputes where multinationals’ may see their methodologies and positions challenged by either of the departments,” said Pratik Jain, partner, national leader, indirect taxation, PwC India.