Transfer Pricing: An Avalanche Of Tax Litigation Is Headed The High Courts' Way
The apex court ruling means that multinationals should prepare for transfer pricing litigation that will soon hit them in India.
In a significant judgement, the Supreme Court on Wednesday held that high courts can examine the correctness of the price at which related parties do business. In tax parlance, this is known as the arm's length price. The ruling is likely to result in companies, mostly multinationals, and the tax department knocking at the doors of high courts.
Now, the transfer pricing litigation is not going to be settled at the income tax tribunal level, Ajay Rotti, founder and chief executive officer at Tax Compaas, told BQ Prime. Everything that the tribunal holds will either be challenged by the revenue or the taxpayer before high courts, he said.
A total of 143 cases ended up before the Supreme Court from various high courts. All on the same question of law on transfer pricing—whether the arm's length price decided by the ITATs can be challenged before high courts.
To elaborate, one party transfers to another goods or services for a price. That price is known as "transfer price". The income tax rules say that when such a transaction happens between two related parties, the price should be at arm's length. Meaning, the price charged should be what an independent party would have commanded.
The apex court has ruled that there can't be an absolute proposition of law that says once the Income Tax Appellate Tribunal decides the arm's length price, that price is final and can't be scrutinised by the high court in an appeal.
The Supreme Court’s ruling is likely to have a significant impact on the litigation around transfer pricing as a large chunk of controversy lies on the issues pertaining to inclusion and exclusion of comparables, selection of filters, computation of tested party margin, etc., which used to attain finality at tribunal stage, said Amit Maheshwari, partner at AKM Global.
"Tax litigation will increase as one may now look at a fresh wave of transfer pricing appeals by revenue as well as taxpayers leading to a further backlog of tax disputes with higher courts," he said.
The top court highlighted that when the determination of the arm’s length price is challenged before a high court, it is always open for the court to consider and examine whether the arm’s length price has been determined while taking into consideration the Income Tax Act and Rules.
The issue that arises is that once these matters go to the high court, no high court judge will sit and analyse the financials of the company and these matters will be sent back to the tribunal for adjudication. The litigation clock will get reset. The judgement will now lead to the number of transfer pricing disputes going up and not settling.Ajay Rotti, Founder and CEO, Tax Compaas
The ruling will mean that the high courts will now have to examine the appeals that are filed before them to examine the determination of arm's length price by the tribunal.
"Most of the appeals will come from the revenue department. That's because the taxpayers have largely won at the ITAT level in the past," Rotti said.