BBC’s I-T survey

What’s in today’s article?

• Why in news?
• What is Income Tax Survey (I-T Survey)?
• What is an Income Tax Search (I-T search)?
• What is the difference between a earch and a survey?
• News Summary: BBC’s I-T survey
• What is transfer pricing?
• Understanding transfer pricing
• What effect does transfer pricing have?
• What is the “arm’s length arrangement” that the BBC has allegedly violated?

 

Why in news?

• The income tax department continued with its surveys for the second consecutive day on the premises of the British Broadcasting Corporation (BBC) at Delhi and Mumbai.
  • The British Broadcasting Corporation (BBC) is the national broadcaster of the United Kingdom, based at Broadcasting House in London.
• As per the officials, I-T surveys were conducted in view of the BBC’s deliberate non-compliance with the transfer pricing rules and its vast diversion of profits.

 

What is Income Tax Survey (I-T Survey)?

• I-T Survey is conducted to collect information on hidden or undisclosed income and property. The survey comes under Section 133A and Section 133B of the IT Act, 1961.
• These survey sections allow the IT authority to enter only a business premise and not a residential premise of the assessee.
• The IT authority can verify cash, books of accounts, documents, stock, and place marks of identification on any books of account or other documents.
• The I-T authority may also impound and retain any books of account or other documents after recording reasons for doing so.
  • The provisions for impounding or seizing the goods were introduced only by the Finance Act, 2002.

 

What is an Income Tax Search (I-T search)?

• A search typically refers to what is called a raid — although the word raid has not been defined anywhere in the Income-Tax Act.
• However, “search” has been defined under Section 132 of the Act.
• IT searches - under Section 132 of the IT Act - include a thorough inspection of buildings, places of business, or residential places in tax evasion cases.
• Under this Section, the I-T Department can carry out a process of inspection by entering and searching any building where it has reasons to believe someone is in possession of undisclosed income or property like money, bullion, gold.

 

What is the difference between a search and a survey?

• Surveys are a milder form of search operations and their main objective is to find information. Whereas, searches are to find unaccounted wealth and records of such transactions.
• While surveys can be conducted only during business hours, searches can be conducted at any time.
• Surveys can only take place on the business premises, while searches can be conducted at any premises business or residential.
• In cases of non-cooperation, authorities conducting searches can break open any door or window; however, it cannot be done during a survey.

 

News Summary: BBC’s I-T survey

• The I-T department is conducting a survey action against the British Broadcasting Corporation (BBC) alleging transfer pricing discrepancies and diversion of profits.
• The surveys were looking into manipulation of prices for unauthorized benefits, including tax advantages.

 

What is transfer pricing?

• Transfer pricing is an accounting practice that represents the price that one division in a company charges another division for goods and services provided.
• Commercial transactions between the different parts of the multinational groups may not be subject to the same market forces that shapes relations between the two independent firms.
• In such transactions, one party transfers to another goods or services, for a price known as transfer price.
  • This may be arbitrary and dictated, with no relation to cost and added value, diverge from the market forces.
• Hence, the expression "transfer pricing" generally refers to prices of transactions between associated enterprises which may take place under conditions differing from those taking place between independent enterprises.

 

Understanding transfer pricing

• Suppose a company A purchases goods for 100 rupees and sells it to its associated company B in another country for 200 rupees, who in turn sells in the open market for 400 rupees.
• Had A sold it direct, it would have made a profit of 300 rupees. But by routing it through B, it restricted it to 100 rupees, permitting B to appropriate the balance.
• The transaction between A and B is arranged and not governed by market forces. The profit of 200 rupees is, thereby, shifted to the country of B.
• The goods is transferred on a price (transfer price) which is arbitrary or dictated (200 hundred rupees), but not on the market price (400 rupees).

 

What effect does transfer pricing have?

• The effect of transfer pricing is that the parent company — or a specific subsidiary — tends to produce insufficient taxable income or excessive loss on a transaction.
• Profits accruing to the parent can be increased by setting high transfer prices to siphon profits from subsidiaries domiciled in high-tax countries, and low transfer prices to move profits to subsidiaries located in low-tax jurisdiction.

 

What is the “arm’s length arrangement” that the BBC has allegedly violated?

• Section 92F of the Income Tax Act, 1961 defines arm’s length price as a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions.
• I.e., the price a division or subsidiary of a company pays to buy goods or services from another division or subsidiary should be the same as the market rate — as if the two entities were unrelated.
• This is the rule the BBC has allegedly violated.

 

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Q1) What is BBC?

The British Broadcasting Corporation (BBC) is the national broadcaster of the United Kingdom, based at Broadcasting House in London. It is publicly financed broadcasting system in Great Britain, operating under royal charter.

 

Q2) What is Income Tax?

Income tax is a direct tax that a government levies on the income of its citizens. The Income Tax Act, 1961, mandates that the central government collect this tax. The government can change the income slabs and tax rates every year in its Union Budget.

 

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Source: I-T Dept ‘surveys’ BBC: What is a survey by the taxman, and how is it different from an I-T ‘raid’? | Income Tax India | Hindustan Times | Indian Express