Directors’ fees no longer a pricing issue

In a move that will facilitate ease of business, domestic transfer pricing provisions will apply only if one of the parties to a deal is availing of tax benefits.
Traditionally, transfer pricing applied to international transactions entered into by a company in India with related parties, such as its foreign parent company or overseas group companies. Pricing of the transaction had to be at arm’s length — which refers to a true unbiased value — to ensure that India got its due share of tax.

However, the Finance Act, 2012 expanded the ambit to cover domestic transactions (which included payment to directors) entered into by a company with related parties if the aggregate of such transactions in a year was over Rs 5 crore.
The top-most challenge of India Inc was substantiating that directors’ fees paid by it was at an arm’s length. A director fee would depend on many factors, including size of the company, industry sector. Even Mukesh Ambani and Azim Premji were unlikely to receive the same quantum of fees. This amendment will put an end to fears of litigation.