New Delhi: The Income Tax Department on Friday issued a statement regarding a survey conducted at the Delhi and Mumbai offices of “a leading international media company”. it said it was Several financial irregularities found In reporting the company’s income and profits from its Indian operations.
The statement was released hours after the department concluded three day survey Thursday late evening from the BBC office.
The discrepancies alleged were minor irregularities with regard to transfer pricing and arm’s length pricing.
“Additionally, the survey revealed a number of inconsistencies and inconsistencies with respect to transfer pricing documentation,” the statement said. “Such discrepancies pertain to the level of relevant operations, asset and risk (FAR) analysis, incorrect use of comparables applied to determine the correct Arm’s Length Price (ALP) and inadequate revenue sharing, among others.”
While the widely alleged irregularities are reasonably simple to follow, the concepts of transfer pricing, FAR and ALP require some explaining.
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What is transfer pricing?
Transfer pricing is basically an accounting practice that enables subsidiaries of the same company to transact with each other. As an example, assume that Company A has two subsidiaries, Firm A and Firm B. Firm A and Firm B are separate companies in their own right, and therefore cannot freely transfer resources or services between each other.
Transfer pricing is the way in which they ‘price’ these resources when transacting with each other. Typically, such transfers should be priced at the market rate.
FAR analysis is simply a method of determining what the market price of a particular item or service is for transfer pricing purposes.
Similarly, arm’s length pricing is a concept that relates to the prices charged by subsidiaries to each other. This basically means that a subsidiary should charge the other subsidiary the same price as it would charge an unrelated company. That is, he should keep his sibling company at arm’s length.
For the most part, this is standard practice and doesn’t pose a problem. However, there is a possibility that transfer pricing can be used to avoid tax.
Using the same example, suppose that firm A charges firm B less than the market price for its services. In such a scenario, firm A earns less because it is getting less money for its services, but firm B makes more profit because it is paying less for its inputs. The overall effect on the parent company, Company A, is the same.
Now, consider a situation where firm A is in a high tax country and firm B is in a low tax country. By charging less for its services, Firm A has ensured that it pays less tax because its revenue is lower, while Firm B also pays less tax on its higher profits because of the tax rates where it is located. are less. Overall, the parent company comes out of the transaction paying less taxes.
“During the course of the survey, the department collected several evidences relating to the operations of the organization which indicate that tax has not been paid on certain remittances which have not been disclosed as income in India by the overseas entities of the group ” The statement of the IT department said.