Directors' Fees pose Transfer Pricing Challenge for Companies

India Inc, which has to comply with domestic transfer pricing provisions for the first time since the norms were introduced by the Finance Act, 2012, faces compliance challenges. The top-most concern is substantiating that directors' fees paid by companies are at an 'arm's length' — which refers to a true unbiased value.

The problem arises because transfer pricing provisions are based on establishing comparability. To illustrate, remuneration received by Reliance Industries chairman Mukesh Ambani is bound to be vastly different from what his counterpart at Wipro, Azim Premji, is paid. It also cannot be compared with director's remuneration paid by a medium-sized private company.

Fees payable to a director by a company depends on many factors such as the director's role and responsibility, experience, the size and area of operation of the company, performance of the company and performance of the industry (see table for examples). "Any kind of payment such as salary, commission, sitting fees, various allowances to any director - be it a comprehensive remuneration package to a chairperson or sitting fees running into a few thousand paid to an independent director — are all covered by domestic transfer pricing provisions. Benchmarking of payments to directors is not an easy task," says Sanjay Tolia, partner, PWC.

Times of India, 25-09-2013, New Delhi