MUMBAI, Feb 18 (Reuters) - India is aggressively pursuing
tax claims against multinational firms operating in the country
as the government seeks to rein in its budget deficit, taking
particular aim at IT and back-office functions, tax officials
It has targeted several multinational companies in recent
years for tax audits on transfer-pricing, but over the past 12
months has widened the scope of the investigations, tax
Authorities are now checking deals involving more than three
dozen companies, focusing on transactions worth at least 250
million rupees ($4.7 million), officials said. Having just
issued claims for the financial year to March 2009, it has
shifted focus to 2009/2010.
Transfer pricing is the value at which companies trade
products, services or assets between units across borders, a
regular part of doing business for a multinational.
Revenue authorities in many countries including Britain,
France, Germany and the United States are increasingly
challenging efforts of companies to minimise tax liabilities by
moving taxable income from higher-taxing jurisdictions to
In India's case, critics worry overly aggressive tax
authorities could undermine foreign investment although tax
officials say they have been working overtime as Finance
Minister P. Chidambaram looks to make up a revenue shortfall and
head off the threat of a credit rating downgrade.
"On some days we had to work through the night to meet the
deadline," said one official. "There are so many cases that are
coming to us but we don't have an adequate number of people."
At least 1,500 transfer pricing disputes were in litigation
in India as of February 2011, compared with fewer than six in
the United States and none in Taiwan or Singapore, an Ernst &
Young survey showed in August 2012. Still, Western campaigners
say BRIC countries - Brazil, Russia, India and China - are
tougher on corporate tax avoidance than developed countries.
One company in the cross hairs, Anglo-Dutch oil major Royal
Dutch Shell, said earlier this month it would challenge
a claim its local unit underpriced shares transferred to the
parent by $2.8 billion. Shell said the claim is based on an
"incorrect interpretation" of tax rules and "bad in law".
Shell said its India unit issued 870 million shares to
parent Shell Gas BV at 10 rupees apiece in 2009 but that tax
authorities valued them at 183 rupees each.
Effectively, India is demanding the tax on the interest
Shell would have earned on the $2.8 billion, in the largest ever
claim in an Indian transfer pricing case, tax officials said.
South Korea's LG Electronics Inc, Singapore
property group Ascendas, French IT services firm Capgemini
and chocolate maker Cadbury, are among numerous global
companies involved in transfer pricing disputes in India,
documents at the tax department's appellate tribunal show. These
companies have challenged the tax department's orders.
In information technology and business process outsourcing
(BPO), the tax department believes many firms are taking
advantage of low costs in India to develop high-end, patented
services or products that are sent to overseas parent firms as
low-value routine work, the tax officials said.
These sectors are expected to account for more than half the
total claims in transfer pricing deals in the fiscal year
2008/09, one of the officials said, up from about one-third
Outsourcing makes up more than $100 billion of India's
economy with companies such as Accenture, Bank of
America Merrill Lynch, and Microsoft Corp
employing thousands in functions such as customer service, risk
and fraud management and finance and accounting.
A spokeswoman for the National Association of Software and
Services Companies said the Indian outsourcing lobby group was
concerned tax authorities have been making "inconsistent and
very aggressive adjustments."
HOT TAX ISSUE
Because valuing an internal transaction is often a matter of
opinion and assumption of future growth, companies and tax
authorities can arrive at widely divergent views on their value.
"Some of their decisions on valuations are very arbitrary
and obviously may not be sustainable at higher appellate
levels," said Sanjay Tolia, partner for transfer pricing at
Price Waterhouse & Co in Mumbai.
In LG Electronics' case, tribunal documents show the
company's Indian unit was deemed to be promoting the LG brand
owned by its parent, which should have compensated the local
unit, thereby generating taxable income. Authorities claim the
excess expenditure amounted to a transfer pricing adjustment of
1.61 billion rupees.
Earlier this month, British-based mobile phone giant
Vodafone Group Plc said it had received a fresh transfer
pricing order in India over the issue of shares by a unit,
adding to its tax woes in the country. India's tax office says
the Vodafone unit under-priced shares issued to a
Mauritius-based group company by nearly 13 billion rupees ($244
million), ET NOW TV station reported recently. Vodafone said it
would challenge the order.
Vodafone is already fighting a transfer pricing case in the
Bombay High Court that involves a $1.6 billion disagreement, a
person with direct knowledge of the matter said. The company
declined to comment.
India is also trying to claim more than $2 billion in tax
stemming from Vodafone's 2007 acquisition of an Indian mobile
company from Hong Kong's Hutchison Whampoa Ltd.
Vodafone says share subscriptions are not covered by either
Indian or international rules on transfer pricing so the latest
order had "no basis in law".
Tax officials say that while shares are not taxable, the
department is increasingly clamping down on under-priced share
deals on the premise that it is losing out on taxing the
interest that the adjusted amount would have earned.
Still, consultants say the department's argument would not
stand the test of law.
Cadbury said it has challenged a ruling made against it for
2007-08 and that India's income tax tribunal had granted a stay
on the demand upon payment of less than 10 percent of the
The income tax department argues the local unit overpaid its
parent for brand royalty and service fees, thereby lowering its
profit in India and resulting in a lower tax obligation.
"It is not uncommon that the income tax department and a tax
payer have a difference of opinion on the interpretation of tax
laws," Cadbury said in a statement to Reuters.
Ascendas and Capgemini also declined to comment.
The average corporate tax rate in Asia in 2013 is 22.89
percent while in Europe it is 20.49 percent, compared with 32.45
percent in India, KPMG says.