The days for information arbitration may just be over for many companies.

The special valuation branch of the customs department is scrutinising transfer pricing methodologies of several multinationals with a view to reconcile their tax and import-expert submissions .

Up until now, the MNCs used to file separate transfer pricing positions to both departments, one for taxation purpose and other for international trade. Since the two departments wouldn’t share data or information with each other, companies could get away with the information arbitrage in some cases said insiders.

Transfer price is basically a price charged by a subsidiary or a division of a company to another. The rules suggest that there has to be an ‘arm’s length’ while fixing this price so that it’s not too low or too high than the existing open market prices. Tax officers can question and demand tax in case they suspect that companies are escaping taxes.

The customs department too has its own valuation mechanism whereby it checks the price of the imports and exports to subsidiaries outside India.

“Collaboration between customs and income tax department was initiated few years ago, it’s only recently that we have seen that data and information provided by businesses to one is being used by the other more frequently. While the objectives of both the departments could be different, there could be disputes where multinationals’ may see their methodologies and positions challenged by either of the departments,” said Pratik Jain, partner, national leader, indirect taxation, PwC India.

Tax experts say that often the objective of the customs’ department is to challenge the arm’s length pricing and check if companies are underquoting the prices. For the tax department the main objective is to see if the arm’s length price quoted by a company is high and should be lower.

Arm’s length pricing basically is an industry average price at which companies buy and sell goods even when they are not dealing with group companies.

For the first time in 2016, the customs department had sought details from multinationals about their transfer pricing positions with the tax department.

While no notices have been issued yet, that could happen in some cases, say industry trackers in the coming months.

“Customs circulars (on valuation) issued in early 2016 mandate submission of transfer pricing reports apart from other relevant valuation related information. Given that the methodology under both laws for a given transaction could be different, this could be an area of disconnect from a SVB proceedings standpoint,” said Suresh Nair, partner at EY India.

In some cases, avow investors, the transfer pricing figures would be different for genuine reasons. “The transfer pricing for customs is a subjected matter of logistics department in a company. While the finance or the tax team looks at transfer pricing for taxation, and often these two departments don’t talk to each other in a company,” said a senior financial official in a multinational.

“It’s important for companies to align their customs and transfer pricing strategies. Extensive use of data provided under one regulation by other government officials seems to be a fundamental shift in tax administration and it here to stay,” said Jain.

People in the know said that some companies would show lower margins for custom submissions and higher margins for taxation purposes for transfer pricing on the same transaction with subsidiaries outside India

Source : Times of India