Wednesday, December 15, 2010

MNCs NEED TO PASS 'BENEFIT TEST' FOR CLAIMING OVERSEAS EXPENSES

Multinational companies in the country could find it difficult to reduce their tax liability by claiming
expenses in the name of a service bought from their overseas associated companies. They will be required to pass a benefit test for making such claims as per arms length conditions. The test is to prove that the tax payer benefited from the service and the amount it paid to its group firm as an expense on the service was justified.

CLOSE WATCH

  • The benefit test has assumed great significance when it comes to transfer pricing issues.
  • The co should also be able to demonstrate that it derived some benefits when it paid that amount and thus comply with the benefit test.
  • Allowing illegitimate expenses by firms can also be seen as a way to avoid tax liability in India.
  • In a recent ruling, the Bangalore tax tribunal said expenses shown on account of mgmt services fee cannot be allowed as the company concerned Gem plus India Private- failed the benefit test.


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