Quality assessment is answer to transfer pricing litigation
Cross-border transactions have always been a challenge to tax authorities
India’s transfer pricing rules and the rising number of litigation over transfer pricing assessments have been a concern for the global business for some time. According to estimates by some experts, India has the highest number of transfer pricing litigations.
Transfer pricing rules are intrinsically dynamic, evolving with time and locations with new additions of provisions and deletion of old ones in relevant laws.
Transfer pricing is being viewed as a by-product of monopoly capitalism now in operation globally. And cross-border transactions have been a challenge to tax authorities in several ways since the inception of transfer pricing rules in 2001. At present, over 60 per cent of the cross-border trade is carried out between related parties. A direct fallout of this trend is the pressure on tax authorities to find ways to get their respective share of revenue from the cross-border transactions. For understandable reasons, tax authorities apprehend a veil in most of the cross-border transactions between related parties that may steal the respective tax regimes the revenue legitimately due to them. The genesis of transfer pricing rules is this apprehension. A tax conclave held in Delhi last week had blared an account of the pending transfer pricing cases and the revenue locked up in various stages of litigation. A report presented at the tax conclave states that India has seen the “largest transfer pricing litigations across the world”. The report further stated that transfer pricing disputes have increased in the past five years and consequently there was an escalation in the amount of transfer pricing adjustments.
This conclusion was based on figures published by the government. The report states that transfer pricing adjustment at first increased progressively and then in geometric proportions”. At one stage in 2013, the transfer pricing adjustment had crossed Rs 70,000 crore, which not a small amount. It is about 10 per cent of the country’s direct tax collection projection for the current fiscal. The tax demand from transfer pricing cases locked up in litigation has risen from Rs 1,220 crore in 2005-6 to Rs 46,466 crore in 2014-15.
It is not that the government has been oblivious to the problem of increasing number of litigations. Setting up the dispute resolution panel (DRP) for a speedier end to disputes was a major step on the part of the government. The key advantage of DRP is a certainty of the conclusion of the proceedings within nine months, coupled with abeyance of tax demands until the final order is passed by the assessing officer. From the Rs 37,595 crore involved in 2009-10, the amount dealt by DRP rose to Rs 1,23,808 cr in 2014-15. The number of cases however remained static around 1100.
DRP too has its shortcomings. It is generally viewed as a forum that usually confirms the transfer pricing order. Further, most tax payers still consider D R P as a fast track mode to approach the second appellate forum , the Income Tax Appellate Tribunal.
Who win these litigations? In most cases tax payers win. About 69 per cent of the cases before Supreme Court, high courts and tribunals were decided in favour of the tax payers. In tribunals, 292 out of 429 case filed were decided in favour of the tax payers. Only 21 cases have been decided in favour of revenue. In the remaining cases, results were mixed. The high courts have ruled in favour of the tax payer in 86 per cent of cases.
It is true that many MNCS with their ability to campaign with their muzzle and deep pocket would chose to pressurise a system to tilt to their advantage. But it is also true that system has a duty to modify itself into the one that make only fool proof assessments.. Quality assessments that can withstand the scrutiny of courts will help reduce litigations eventually. Litigations will continue rising until the government set up an effective machinery that can ensure high degree of quality in all transfer pricing assessments. The government should also know that it lose many of its tax cases because of the poor representation of their cases in the courts of law. Therefore, a mechanism that ensures quality assessments that will be supported by top class lawyers will eventually reduce the number of litigations.
