Promoted as Joint Commissioner of Income Tax

Hai Freinds.

Thank you very much for the support given by the viewers of this blog. It has been a wonderful experience to blog. I am a regular reader of The Economic Times and other financial papers regarding the state of our economy, sectoral performances and all macro economic indicators since 1991, when Indian economy has faced balance of payment crisis due to Gulf War and when the Economic Reforms have been initiated by the then FM, Mr. Manmohan Singh. It is a long way since then. Economics was one of my electives in my engineering days in IIT, Kharagpur and I got EX grade in Industrial Economics and I did write one small thesis on "Gulf Crisis and its effect on Indian economy" for the elective.

Coming to professional life in Indian Revenue Service (IRS), I always tried to contribute my best to the Service and the Income Tax Department. As all of you know, the promotion in Government is based purely on seniority and also subject to the vacancies available in that cadre. Based on the seniority, after completion of almost ten years in the service, yesterday, I have been promoted as Joint Commissioner of Income Tax from the level of Deputy Commissioner of Income Tax. The Central Board of Direct Taxes (CBDT), New Delhi, which issues the prmotion and transfer orders posted me in Transfer Pricing in Banglore, Karnataka.

What is Transfer Pricing?

Transfer Pricing is a concept which mainly deals with valuation of cross border transactions between related parties. As per the provisons of Sec. 92CA of the Income Tax Act, 1961, if any person has entered into an international transaction (transaction between related resident and non-resident persons or associated enterprises) in any financial year, and the Assessing Officer (the Officer who assesses the income of Indian entity) considers it necessary, he refers the computation of the arm’s length price in relation to the said international transaction under to the Transfer Pricing Officer. the Transfer Pricing Officer, after gathering all the material from the assessee (tax payer) or from any other source and after giving due opportunity to the assessee to explain, determines the price at which the transaction should have taken place if both the parties areunrelated or at arm's length principle. There are various methods by which the arm's length price can be determined.

Some of the methods prescribed in the Act for determing arm's length price are:-

1. comparable uncontrolled price method;
2. resale price method;
3. cost plus method;
4. profit split method;
5. transactional net margin method;

The Assessing Officer has to apply the most appropriate method relevant to the filed in which the resident or non-resident is dealing. Of course, it will take some time before I can give lectures on Transfer Pricing. The Transfer Pricing is the most happening thing along with International Taxation in my Department as cross border transactions are increasing and also overseas Mergers & Acquisitions are on the raise.

Why Transfer Pricing:-

I will take classic example of software MNCs setting up shop in India. Most of the software companies either susidiaries of parent US or foreign companies or branches of foreign companies are claiming 100% income tax exemption U/s 10A or 10B by setting up their units in STPI areas or SEZs. Now, when these MNCs sell their software products or services to their parent companies or their subsidiaries, they inflate the sale value and claim more profits so that they get more benefit by way of income tax exemption here in India. This also results in claiming more expenditure in the country in which they are residents, thus saving both ways. Hence, the Transfer Pricing Officer (TPO) will determine the correct price at which such transactions take place as if both parties in the transaction are unrelated and the resident company, branch or firm will be denied income tax exemption on the difference between the reflected value of the transaction and the value determined by the TPO.

Thank You.

If you have any doubts on transfer pricing, I hope I can answer some of them. Please e-mail me at pramoneel@yahoo.co.in for answering the questions only on the basic provisions of the Act or on transfer pricing in general, as I am precluded from giving an opinion as I am a Government Servant.