Transfer pricing disputes: Apply mind before sending tax demands says Income Tax Appellate Tribunal
MUMBAI: In an order that may benefit multinational and Indian companies that are tied down in transfer pricing disputes with the revenue department, the Income Tax Appellate Tribunal has held that officers must “apply their mind” before firing off tax demands.
Assessment officers (AOs) as well as commissioners of the income tax (CIT) must analyse each case, the tribunal said in a recent order. They must apply their minds instead of referring cases to transfer pricing officers mechanically. Transfer pricing refers to rates at which entities within an enterprise or group transact in goods and services with each other.
The ruling will have a bearing on many current transfer pricing disputes and may prompt companies to ask for the quashing of tax demands raised by the revenue department, said some industry officials.
“Theoretically, many companies could claim that the transfer pricing was slapped by the revenue department, mainly the AOs and the CIT, without analysing the case. This could also mean that many companies would expect that the tribunal must delete all the adjustments made,” a person familiar with the development said.
“This judgment may benefit the corporate sector in getting their transfer pricing demands quashed since the process of automatic reference to the transfer pricing officer (TPO) for international transactions of more than Rs 5 crore, as laid down under the CBDT (Central Board of Direct Taxes) circular, had done away with the independent application of mind by the IT officers,” said Nandish Vyas, a partner at Veritas Legal, a law firm.
The ITAT is an entity under the Ministry of Law and Order that seeks to bring quick justice in tax disputes.
In a case between Tata Consultancy Services and the deputy commissioner of income tax, the Mumbai ITAT observed, “…it is only after proper application of mind to all the facts and holding a prima facie belief that the AO can make a reference to the TPO, or that the ld. CIT (A) can grant approval to such a reference.”
India has been one of the toughest places for transfer pricing transactions, accounting for about 70% of the global disputes and 2% of global trade, according to International Tax Review, 2014. The tribunal’s decision comes when the Narendra Modi government is trying to ease transfer pricing rules. While the tribunal’s order could be challenged in court, it may become a key reference point until a final judgement is issued, according to industry officials.
“There are a large number of transfer pricing matters in the tribunal and assessees will now take this stand because in most cases, the references by the AO to the TPO are “automatic” and it will be very difficult at this stage for the tax department to show that the AO or the CIT have applied their mind,” a person close to the development said.
ET reported on May 21 that the CBDT is taking a close look at 120 transfer pricing disputes and seeking to resolve them by signing ad vance pricing agreements, which will list the rules for intra-group transactions and the rates at which they will be taxed.
