Explained: All about Transfer pricing, other discrepancies found by tax authorities at BBC

A survey conducted by the Income Tax Department at British Broadcasting Corporation's (BBC) offices in Delhi and Mumbai were in the news for three days. Following the move which came in the aftermath of an uproar over BBC's documentary about Prime Minister Modi, tax authorities revealed that it found discrepancies related to transfer pricing documentation. While IT says that the income of BBC's entities were not in line with operations, transfer pricing irregularities are used as basis to claim that taxes weren't paid on some of the firm's remittances.

With irregularities related to taxation under the scanner amidst a political storm around BBC, here's what transfer pricing, withholding tax and other terms mentioned by the tax authorities indicate.

How can transfer pricing be misused?

Simply put, transfer pricing is the cost that one company under a conglomerate, charges from the parent firm or another company of the group. This could be for specific services provided, raw materials or products, and money flows within the organisation.

BBC being a multinational company with various subsidiaries, can use this to distribute profits among firms in different jurisdictions, to save taxes. This means that it can pay more to a firm in a place with lower taxes, to pay less tax on a larger amount.

The tax authority hasn't named the BBC in its statement after the survey at BBC premises ended, and hasn't shared further details about the transfer pricing discrepancies so far.

Withholding tax within the organisation

The CBDT also mentioned withholding tax, this is the amount deducted and held back by the employer while paying the employee. In BBC's case the department claims that reimbursements were made by the Indian entity to an overseas firms for services of seconded employees. It says that the withholding tax wasn't deducted by the Indian arm of the multinational while paying those remittances.

Tax authorities also allege irregularities in deciding the arm's length price, which is a rate agreed upon for transactions between related parties, as if they were unrelated.