Central idea: The Income Tax Department has conducted surveys at the premises of the British Broadcasting Corporation (BBC) in Delhi and Mumbai. The BBC has been deliberately violative of transfer pricing rules.

Transfer Pricing: A Tax Evasion Technique

• Transfer pricing refers to the practice of determining the price at which goods, services or intangible property are sold between related entities within an enterprise across international borders.
• It is a practice of multinational companies transferring profits to low-tax jurisdictions to reduce their tax liabilities.

What is a ‘Survey’ under the I-T Act?

• Section 133A of the Income Tax Act, 1961 empowers the Income Tax Department to conduct surveys to collect hidden information.
• I-T authority can enter any place of business or profession within their jurisdiction, verify books of account, and impound documents if needed.

What is an I-T search?

• Section 132 of the Income Tax Act, which I-T Department to conduct searches when it has reasons to believe that someone is in possession of undisclosed income or property.

Differences between a survey and a search

• A survey is a less serious proceeding than a search and can only be conducted during working hours on business days within the limits of the area assigned to the officer.
• In contrast, a search can happen on any day after sunrise, and the entire premises can be inspected to unravel undisclosed assets, with the help of police.
• While the scope of a survey is limited to the inspection of books and verification of cash and inventory, in a search, the entire premises can be inspected to unravel undisclosed assets, with the help of police.

Powers of the I-T authority during a search

• The provisions for impounding or seizing the goods were introduced only by the Finance Act, 2002.
• The Act says that during a search, an authorized officer can:

1. Enter and search any building or place where he has reason to suspect that such books of account, other documents, money, bullion, jewellery, or other valuable article or thing are kept;
2. Break/open the lock of any door, box, locker, safe, almirah, or other receptacles for exercising the powers conferred by clause (i) where the keys thereof are not available;
3. Seize any such books of account, other documents, money, bullion, jewellery, or other valuable article or thing found as a result of such search;
4. Place marks of identification on any books of account or other documents or make or cause to be made extracts or copies therefrom;
5. Make a note or an inventory of any such money, bullion, jewellery, or other valuable article or thing.

What are Transfer pricing rules?

• By setting transfer pricing rules, countries can ensure that companies pay taxes on profits generated within their jurisdiction.
• Transfer pricing rules are used to determine the “arm’s length price” at which transactions between related entities should take place.
• The arm’s length price is the price that would have been charged between unrelated entities in similar circumstances.
• The rules aim to ensure that related entities do not shift profits to low-tax jurisdictions, and that the tax authorities of different countries get their fair share of taxes.

What is the role of tax authorities in curbing transfer pricing?

• Audit: The tax authorities can carry out transfer pricing audits to determine whether the prices used in transactions between related entities are in accordance with the arm’s length principle.
• Compliance of Arm’s length principle: If the tax authorities find that the prices are not in accordance with the arm’s length principle, they can make adjustments to the prices and levy taxes accordingly.

What is the “Arm’s Length Arrangement” that the BBC has allegedly violated?

• Section 92F(ii) of the Income Tax Act, 1961 defines arm’s length price as “a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions”.
• Section 92C(1) says arm’s length shall be determined by the “most appropriate” among the following methods:
• comparable uncontrolled price method;
• resale price method;
• cost plus method;
• profit split method;
• transactional net margin method;
• such other method as may be prescribed by the I-T Board.

What lies ahead for BBC?

• BBC will have to comply with transfer pricing rules in each country in which they operate.
• Failure to comply with transfer pricing rules can lead to tax liabilities and penalties.
• Compliance with transfer pricing rules can be complex and require the assistance of tax experts.

Try this MCQ:

Q. Which government agency regulates transfer pricing rules in India?

A) Reserve Bank of India

B) Securities and Exchange Board of India

C) Income Tax Department

D) Ministry of Corporate Affairs

 

Post your answers here.

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