HC can decide on transfer pricing litigation, rules SC
Mumbai, April 21, 2023
Transfer pricing litigation is a concern for MNCs operating in India with their subsidiaries or group companies. Such litigation will now not be final at the level of Income Tax Appellate Tribunals (ITATs) but can move to the high courts, sparking some apprehension among MNCs of a long-drawn battle. The Supreme Court on Wednesday pronounced a landmark ruling that HCs can examine whether or not the findings of the ITAT, while determining the arm’s length price, are perverse or not. In this backdrop, tax experts view that alternative mechanisms like advance pricing agreements (APAs) could gain more traction.
International transactions with related parties (say, a subsidiary in India providing back-office services to its US parent company) come within the transfer pricing ambit. The transfer pricing study has to show that the price charged by the Indian subsidiary is at an arm’s length(same as the price it would transact with third parties).
Transfer pricing litigation arises when the profit margin charged by the Indian company to its overseas group company is disputed by authorities in India. A higher margin results in a higher revenue for the Indian entity and a higher tax outgo. The SC was hearing a batch of 143 appeals (SAP Labs India and others) on whether the arm’s length pricing decided by ITATs can bechallenged before HCs. The apex court has now remitted these cases back to the respective HCs, which have nine months to decide whether the principles of arm’s length were followed by ITAT and whether the findings recorded by the tax tribunals while determining the arm’s length price were perverse or not.
SC advocate Deepak Joshi said, “Transfer pricing litigation revolved around ‘factual’ issues, such as use of comparable companies in the transfer pricing study, or the method adopted to determine the arm’s length price. HCs refused intervention in transfer pricing litigation on the grounds that the tax tribunal is the final fact-finding authority. An appeal to the HC lies only on a substantial question of law. The SC, via its order, has disturbed the sense of finality that many taxpayers had achieved in transfer pricing litigation at the tribunal levels.
EY India tax partner & national leader transfer pricing, Vijay Iyer, said, “The order of the SC is not conclusive that all transfer pricing disputes will have access to HCs and the apex court. HCs will need to assess in specific cases whether a question of law arises, nature of the grounds of appeal and the basis of the ITAT’s conclusion. It is fair to say that there could be some cases where questions of law might arise and hence rejecting all appeals at the HC level might not be judicious.” Tax professionals vouch for the increased efficiency of the APA mechanism, a forum that is likely to gain more traction.
[The Times of India]
