India is aggressively pursuing tax claims against multinational firms operating in the country as the government seeks to rein in its budget deficit, taking particular aim at IT and back-office functions, tax officials say.
It has targeted several multinational companies in recent years for tax audits on transfer-pricing, but over the past 12 months has widened the scope of the investigations, tax officials said.
Authorities are now checking deals involving more than three dozen companies, focusing on transactions worth at least Rs 250 million ($4.7 million), officials said. Having just issued claims for the financial year to March 2009, it has shifted focus to 2009-2010.
Transfer pricing is the value at which companies trade products, services or assets between units across borders, a regular part of doing business for a multinational.
Revenue authorities in many countries including Britain, France, Germany and the United States are increasingly challenging efforts of companies to minimise tax liabilities by moving taxable income from higher-taxing jurisdictions to lower-tax ones.
In India's case, critics worry overly aggressive tax authorities could undermine foreign investment although tax officials say they have been working overtime as Finance Minister P. Chidambaram looks to make up a revenue shortfall and head off the threat of a credit rating downgrade.
"On some days we had to work through the night to meet the deadline," said one official. "There are so many cases that are coming to us but we don't have an adequate number of people."
At least 1,500 transfer-pricing disputes were in litigation in India as of February 2011, compared with fewer than six in the United States and none in Taiwan or Singapore, an Ernst & Young survey showed in August 2012.
Still, Western campaigners say BRIC countries - Brazil, Russia, India and China - are tougher on corporate tax avoidance than developed countries.
One company in the cross hairs, Anglo-Dutch oil major Royal Dutch Shell, said earlier this month it would challenge a claim its local unit underpriced shares transferred to the parent by $2.8 billion. Shell said the claim is based on an "incorrect interpretation" of tax rules and "bad in law".
Shell said its India unit issued 870 million shares to parent Shell Gas BV at Rs 10 apiece in 2009 but that tax authorities valued them at Rs 183 each.
Effectively, India is demanding the tax on the interest Shell would have earned on the $2.8 billion, in the largest ever claim in an Indian transfer pricing case, tax officials said.
South Korea's LG Electronics Inc, Singapore property group Ascendas, French IT services firm Capgemini and chocolate maker Cadbury, are among numerous global companies involved in transfer pricing disputes in India, documents at the tax department's appellate tribunal show. These companies have challenged the tax department's orders.
In information technology and business process outsourcing (BPO), the tax department believes many firms are taking advantage of low costs in India to develop high-end, patented services or products that are sent to overseas parent firms as low-value routine work, the tax officials said.
These sectors are expected to account for more than half the total claims in transfer pricing deals in the fiscal year 2008/09, one of the officials said, up from about one-third earlier.
Outsourcing makes up more than $100