BBC Row: Taxmen Allege Transfer Pricing Violation, But Is a ‘Survey’ Justified?

Tax experts concur that ordinarily one does not witness a 'survey/search' for a transfer pricing proceeding.

BBC Row: Taxmen Allege Transfer Pricing Violation; But Was A 'Survey' Justified?

(Photo: Altered by The Quint)

Taxmen showed up at the offices of BBC for the second consecutive day on Wednesday, 15 February, for a ‘survey’, due to the broadcaster's alleged “non-compliance with the transfer pricing rules."

This comes on the heels of a controversy surrounding a two-part BBC documentary focusing on Prime Minister Modi and his role in the 2002 Gujarat riots.

While opposition leaders have questioned the ‘timing of the raids,' the Bharatiya Janata Party (BJP) has maintained that the move is related to ‘tax evasion’ and to ensure that no foreign company is ‘above the law.’

The Allegations: A note shared by the income tax department read:

“The income authorities conducted a survey on the BBC premises in Delhi, in view of the BBC’s deliberate non-compliance with the Transfer Pricing Rules and its vast diversion of profits. It is pertinent to note that the above exercise conducted by the tax authorities, is called a ‘survey’, not a search/raid as per the provisions of the Income Tax Act."

During the survey, phones and laptops of BBC India employees were reportedly seized by the IT officials, and those within the premises were not allowed to leave.

“Such surveys are routinely conducted and are not to be confused in the nature of a search/raid,” the I-T department note clarified.

Tax experts disagree: However, tax experts seem to think that a survey for transfer pricing rule violations is unnecessary:

"The words "diversion of profits"/"transfer pricing" may be a tool to legitimize the survey in public opinion. Though, under tax laws, transfer pricing "assessments" are fairly regular - with no surveys, searches & seizure of assets."

Accountant Deepak Joshi on Twitter

So, what is transfer pricing? And was a ‘survey’ the right call for the investigating agency? We explain.

What Is Transfer Pricing?

“Transfer pricing refers to the prices of goods and services that are exchanged between companies under common control,” according to the Corporate Finance Institute.

Entities under common control are those that come under the control of a single parent corporation.

Thus, if a subsidiary company sells goods or renders services to its holding company or a sister company, the price charged is referred to as the transfer price. 

So, How Does Transfer Pricing Work?

A note on the IT-department website points out:

“Suppose a company A purchases goods for 100 rupees and sells it to its associated company B in another country for 200 rupees, who in turn sells in the open market for 400 rupees.

“Had A sold it (the good) directly, it would have made a profit of 300 rupees. But by routing it through B, it (A) restricted it (profit) to 100 rupees, permitting B to appropriate the balance.

“The transaction between A and B is arranged and not governed by market forces. The profit of 200 rupees is, thereby, shifted to the country of B. The goods is transferred on a price (transfer price) which is arbitrary or dictated (200 hundred rupees), but not on the market price (400 rupees).”

According to transfer pricing experts Google is “a very particular case in transfer pricing matters.”

“This global tycoon reduced its taxes by $3.1 billion from 2007 to 2010 by transferring most of its offshore profits through Ireland and the Netherlands to Bermuda,”  notes Carlos Vargas Alencastre, in an piece for the International Tax Review.

“Google’s practices are very similar to those of countless other global companies operating in a wide range of industries,” Alencastre adds.

What Is The Point Of Transfer Pricing? 

Through transfer pricing, the parent company or a specific subsidiary tends to produce insufficient taxable income or excessive loss on a transaction, the income tax website explains further.

“A group which manufactures products in a high tax countries may decide to sell them at a low profit to its affiliate sales company based in a tax haven country. That company would in turn sell the product at an arm's length price and the resulting (inflated) profit would be subject to little or no tax in that country. The result is revenue loss and also a drain on foreign exchange reserves,” it adds.

Note: 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.”

According to the I-T department, the BBC has been accused of not following  the “arm’s length arrangement” in the allocation of profit.

So, Was a Survey Justified In BBC’s Case?

“ I am Surprised this situation has arisen. No room for a survey on transfer pricing issue," a senior corporate lawyer HP Ranina told a news channel.

So what then should be the usual protocol?

Deepak Joshi, an accountant and an advocate, took to Twitter to  explain:

• Transfer pricing is an issue which can be decided only by an ‘assessment’ and not a survey.

• By its very nature, transfer pricing  issues are document intensive. These documents are already available before the transfer pricing officer (TPO) in a transfer pricing report on which the assessment is conducted.

“Ordinarily, we don't witness a survey/search for a TP (transfer pricing) proceeding. They'll impound the same docs which are already before them!."

Deepak Joshi

And if there is suspicion of violation… While The IT-department has said that the BBC’s violations of transfer pricing rules has been going on ‘for a long time,’ Ranina is of the opinion that if that were true, the taxmen should have initiated transfer pricing audits, completed the assessment, and allowed the BBC to go into appeal at a tribunal.

“No room for a survey at this point of time because this is a matter of all the documents being with them,” he added.

How Have Indian Authorities Usually Dealt With Transfer Pricing Cases Before This?

In a transfer pricing case involving Olympus Medical Systems India, a subsidiary of Olympus Corp, (India vs Olympus Medical Systems India Pvt. Ltd. 2022), this is how the authorities initiated action:

• A transfer pricing audit was initiated by the tax authorities 

• The audit led to an assessment being issued by the tax authority

• The case was then heard in an Income Tax Appellate Tribunal of India which held that the entity should submit audited financials of its associated companies and failure to do so would lead the tax authority to use the residual profit split method to determine the arm's length principle (ALP)

In another transfer pricing case in India involving Kellogg (India vs Kellogg India Private Limited, 2022):

• The proceedings in the tribunal was based on a ‘transfer pricing report’ prepared by the company

• The Income Tax department issued an ‘assessment’ based on the report

• The tribunal ruled in favour of the Indian entity, stating that no adjustment to the arm's length principle (ALP) was required to be made

(With inputs from NDTV, ITR, and Corporate Finance Institute.)