"I therefore, propose to create an alternative dispute resolution mechanism within the Income Tax department for the resolution of transfer pricing disputes," Finance Minister Pranab Mukherjee said while presenting the Budget.
Transfer pricing refers to pricing of goods and services within an organisation like a parent company to its subsidiary, which determines the tax liability of an Indian subsidiary of foreign company. There is often a dispute between foreign companies and Indian tax authorities in calculating of tax liability.
Mukherjee said that in order to improve the investment climate in the country, the government needs to facilitate the resolution of tax disputes faced by foreign companies within a reasonable time frame.
The issue is a major concern among revenue authorities, who think multinationals may set transfer prices on cross-border transactions to reduce taxable profits in their country.
Mukherjee in his speech also proposed to introduce 'safe harbour' rules, where the tax authorities would automatically accept transfer prices with the companies maintaining specific information-reporting with regard to the transactions.
"To reduce the impact of judgmental errors in determining transfer in international transactions, it is proposed to empower the Central Board of Direct Taxes to formulate safe harbour rules," the Finance Minister said.
He added that these issues are particularly relevant for such companies in the Information Technology (IT) sector.
Meanwhile, welcoming the move IT industry body Nasscom said that the Budget has addressed the issue by creating a dispute redressal mechanism.
Another leading IT company Cognizant also welcomed the move. "The clarity on transfer pricing assessments and the setting up of an independent dispute settlement mechanism is something the industry had sought.
"Finance Minister has announced an industry specific safe-harbour provision which will be notified, it will help in resolving assessment issues relating to transfer pricing," Cognizant president and managing director Global Delivery R Chandrasekaran said.