The Income Tax (I-T) Department in India is currently conducting investigations into the Indian units of Apple, Google, and Amazon regarding potential tax non-payment.
Authorities, as part of a probe initiated in 2021, have sought detailed clarifications from several tech giants concerning their transfer pricing (TP) practices, as per an ET report.
The department is contemplating a tax demand of over INR 5,000 Cr, having rejected numerous justifications provided by the companies in question.
The Indian arms involved in the matter are Apple India Pvt Ltd, Amazon Seller Services India Pvt Ltd and Google India Digital Services Pvt Ltd.
The central issue in this case revolves around the methods used for transfer pricing (TP) adjustments, which the tax department believes may lead to significant tax liabilities. This investigation covers multiple assessment years and is currently under scrutiny and legal process at various levels.
According to an ET report, both Amazon and Apple have engaged PwC for representation in this matter.
Transfer pricing principally aims to curb price manipulation in transactions within corporate groups, thereby reducing tax evasion. By setting transfer prices at arm’s length, or market rates, countries attempt to prevent corporations from shifting profits to low-tax areas. This practice encompasses dealings with both tangible and intangible assets. Compliance with transfer pricing laws in their operational jurisdictions is crucial for companies to mitigate tax-related complications and maintain equitable business operations.
The Income Tax Department is reportedly investigating the three technology behemoths regarding transactions associated with advertisement, marketing, and promotion expenses, payments for royalty, trading and software development segments, as well as marketing support services.
Apple, headquartered in Cupertino, California, holds the title of the world’s most valuable company, boasting a market capitalisation just shy of $3 Tn. Alphabet Inc, the parent company of Google, holds the fourth position in the valuation rankings, while Amazon holds the fifth spot.
In the case of Apple, the focus of the tax investigation primarily centres on the Indian arm’s procurement of finished products from its original equipment manufacturers and subsequent sales in the domestic market.
“While the company argues this is not an international transaction and thus falls outside the purview of taxation, the department contends it to be a deemed international transaction,” a person familiar with the matter informed ET. “The department found that the taxpayer wasn’t paying any royalty on trading, as the assessee couldn’t prove exploitation of the intellectual property, resulting in the royalty amount being benched to nil.”
In the case of Apple India, on expenses related to trading segments, the Income Tax Department has rejected the company’s justifications, leading to an alleged tax liability of hundreds of crores, according to another tax official.
Despite this, the company has seen a significant surge in net profit, increasing by 76% to INR 2,229 Cr, marking the fastest growth in net profit for the company in India over the past five years. Analysts anticipate a rapid increase in the percentage of iPhones manufactured in India, currently over 7%, in the coming years.
These cases go through different resolution stages, such as the dispute resolution panel, Commissioner of Income Tax (Appeals), Income Tax Appellate Tribunal (ITAT), and potentially the high court and Supreme Court. Companies can also choose the Mutual Agreement Procedure (MAP) for an alternative tax dispute resolution under Direct Tax Avoidance Agreements (DTAA).
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