含羞草社区

Taxes on cross-border transactions are typically based on the value of the goods or services usually calculated on their value. In transactions between unrelated parties, that value is generally considered to be fair and uninfluenced by external factors. However, in dealings between related parties, authorities assess whether the relationship has affected the price. Japanese companies with subsidiaries in India must be cautious when setting intercompany prices for goods and services to ensure compliance with tax laws, including customs, transfer pricing (TP), the goods and services tax (GST) and anti-dumping rules.

It is difficult for companies to set prices due to the conflicting objectives of customs, GST and income tax authorities. Customs and GST departments aim to increase the value of goods and services to maximise duty and tax revenue. By contrast, income tax authorities try to reduce expenses or increase taxable income, thus collecting more income tax. Companies involved in cross-border transactions must balance these conflicting priorities, and ensure they comply with all tax laws.

Although customs and transfer pricing share similar valuation methods, their differing objectives produce inconsistent results. For example, the valuation of identical or similar goods under customs law is similar to the comparable uncontrolled price (CUP) method under the TP rules. However, factors such as the functions performed, assets employed and risks assumed (FAR) analysis, crucial in TP, do not feature in customs law.

Similarly, the deductive method, which is working backwards from the sale price of the goods in India, closely resembles the resale price method in TP. The computed value method that calculates the cost plus a reasonable profit for the foreign supplier, parallels the cost plus method in TP. Despite such similarities, courts have usually ruled against the use of customs values for TP purposes, as held in the case of Panasonic Consumer India and Mobis India. This is because customs valuation is focussed on detecting undervaluation, which is contrary to TP principles.

The Income Tax Appellate Tribunal has taken a different stance in recent decisions, such as in the cases of Louis Dreyfus Company India and AT India Auto Parts. The tribunal ruled that government-notified customs data can be used to determine the uncontrolled price by comparing similar goods imported during the same period.

Anti-dumping duties are imposed when goods are exported from Japan to India at a price lower than the price at which such goods are sold in Japan, resulting in harm to the domestic Indian industry. Japanese companies trying to reduce import duties by setting export prices conservatively, could risk facing anti-dumping duties in the future. Hence, the export price must not only comply with customs and TP regulations but also be equal to or higher than the domestic sale price in Japan.

The value of services imported from a related party under GST law is found through a structured, sequential process. First, the open market value is determined, which is the price at which the service would be offered to an unrelated party. Next, the value of the supply of services of like kind and quality is found. This is similar to the CUP method under TP, but without a detailed examination of factors such as quantity or nature of sale. The cost-based method calculates the cost of providing the service plus a 10% markup, as with the cost plus method under TP with a standard markup. Finally, in the best judgment method the assessing officer selects the most appropriate valuation technique.

Services supplied to a related party without consideration are taxable under GST, their value determined using the same methods. Where the integrated goods and services tax is fully available as a credit to the subsidiary in India, the value or price is not scrutinised. Japanese companies must carefully set the price for services provided to their subsidiaries in India, where no credit is allowable for the tax paid.

When setting intercompany cross-border prices for goods or services exported to India, Japanese companies must ensure that the prices meet the criteria under customs and TP regulations. For goods, the price must exceed the domestic selling price in Japan to avoid anti-dumping investigations. For services, when the tax cannot be fully credited to the subsidiary in India, the cost plus 10% model may be used to ensure compliance with GST and TP regulations.

Reena Asthana Khair is a senior partner and Subham Jaiswal is a senior associate at Kochhar & Co.