Income Tax authorities investigating Apple, Google, Amazon over Non-Payment of Tax of Rs. 5,000 crores

The Income Tax Department is now investigating the Indian subsidiaries of technological gigantic companies Apple, Google, and Amazon for alleged tax evasion.

Authorities have asked for detailed explanations from these companies over their transfer pricing practises in connection with an investigation that began in 2021. According to a  report, the department is pursuing a tax claim in excess of Rs 5,000 crore and has rejected several of the companies’ justifications.

Apple India Pvt Ltd, Amazon Seller Services India Pvt Ltd, and Google India Digital Services Pvt Ltd are among the Indian companies participating in this probe.

The essence of the issue revolves around the process of transfer pricing adjustments, which leads to what the department regards as prospective tax obligations. This issue covers several assessment years and is currently being investigated and litigated in numerous forums.

Amazon and Apple have both retained the services of PwC to represent them in this dispute.

The pricing of goods, services, or intangible assets transferred between organisations within the same multinational enterprise group is referred to as transfer pricing. It is a technique for determining the pricing at which diverse components of the group transact with each other. This is critical for tax considerations as well as ensuring that transactions between different areas of the organisation are carried out at fair market value.

The basic purpose of transfer pricing is to prevent price manipulation in intra-group transactions in order to reduce tax liability. Countries aim to prevent companies from transferring profits to low-tax jurisdictions by establishing transfer prices that are in accordance with market rates.

Transfer pricing can involve all tangible items, such as the transfer of products between subsidiaries, as well as intangible assets, such as intellectual property licensing. To prevent potential tax concerns and to maintain fair and transparent business practices, companies must comply with transfer pricing regulations in the countries where they operate.

According to industry insiders close to these tech giants, multinational corporations receive “routine queries” from the department on a regular basis due to differences in tax calculation procedures between the companies and the revenue department. According to an industry source, if these questions are not answered, companies can file an appeal with the appellate body.

The Income Tax Department is looking into transactions involving advertising, marketing, and promotion expenses, royalty payments, trade, software development segments, and marketing support services. The case principally includes transactions categorised as “international transactions” by the tax authorities, which are subject to transfer pricing adjustments. However, the companies reject this analysis, causing the issues to be litigated in multiple places.

The tax investigation focuses on Apple’s Indian arm’s purchase of finished products from original equipment manufacturers and subsequent domestic sales. Despite Apple’s claim that it is not subject to taxation, the government claims that this is considered an international transaction.

In Amazon’s case, 50 % of customer delivery prices were considered advertising, marketing, and promotion costs, resulting in a tax liability of more than Rs 100 crore. Amazon has challenged the case of the Income Tax Department in this matter.

The issue for Google India is around certain transactions that were not recorded as required under Form 3 CEB and were deemed as international taxes by the revenue department, resulting in a tax liability for the company. In Google’s case, previous-year tax claims are currently before the Mutual Agreement Procedure (MAP).

These matters progress through multiple stages of resolution, beginning with the dispute resolution panel and ending with the Commissioner of Income Tax (Appeals), the Income Tax Appellate Tribunal (ITAT), and possibly the High Court and Supreme Court.

Furthermore, under Direct Tax Avoidance Agreements (DTAA), companies can use the Mutual Agreement Procedure (MAP) for alternative tax dispute resolution.