Just a few days after finance minister Pranab Mukherjee stated the government’s intention to simplify tax disputes in Budget 2009-2010, the finance ministry today said it will set up an expert group to formulate safe harbour rules over the next two months.

This may in fact be a sweetener for all future mergers and acquisitions as every time Indian firms with overseas operations sell goods or services to related firms, they come under government scrutiny for transfer pricing rates or the price at which they billed the services or goods to that related party.

Under the proposed rules, if the difference in pricing declared by a firm and the estimates made by the income-tax department is within a reasonable range, the filings will go unchallenged by the tax authority. The department will soon fix such price-ranges for different sectors.

“We plan to work out a formula for transfer pricing in a fast track mode and margins would be set for every industry,” said revenue secretary P V Bhide during an interaction with the American Chamber of Commerce here today.

In the past, high profile buyouts such as that of Vodafone and Hutchison invited scrutiny as tax authorities felt the transaction was routed through overseas holdings companies. The matter is still in dispute. Typically, governments are wary of transfer pricing mechanisms as they fear that a foreign company could use such transactions to drain resources away from the local unit, which leads to litigation.

The expert group would be finalised by next week and the draft rules would be put up for comment on the finance ministry’s website. The final rules would be prepared after deliberating on the feedback received. Talking about service tax related matters, the ministry defended its move to tax only law firms. It said that if lawyers were taxed, legal services may become gouging for certain sections of the society.