Close on the heels of the Union Cabinet accepting the Bombay High Court order in the Vodafone transfer pricing case, the Central Board of Direct Taxes (CBDT) has moved forward on other similar transfer pricing cases.

The CBDT has — through an instruction -- asked its field officers, various income tax appellate tribunals (ITAT) and dispute resolution panel (DRPs) to adhere to the ‘ratio decidendi’ of the Vodafone judgment in all cases where similar issue was involved.

Simply put, the CBDT has asked the income tax department to apply the principle behind the tax ruling involving the Vodafone Group to all other similar transfer pricing cases.

This would mean that the income tax department would henceforth not be able to make transfer pricing adjustments on the premium component of the shares issued by Indian units to their overseas parents.

The Union Cabinet had on January 28 accepted the order of the Bombay High Court in the Vodafone transfer pricing case and decided not to file special leave petition (SLP) against it before the Supreme Court.

The Modi-led Government also decided to accept orders of Courts/IT Act/DRP in cases of other taxpayers where similar transfer pricing adjustments have been made and the courts/IT Act/DRP had decided in favour of the taxpayer.

CBDT INSTRUCTION

To see the Cabinet decision through in ‘fit and proper manner’, it was imperative that CBDT issued an instruction and that has happened, Aseem Chawla, Partner, MPC Legal, a law firm, told Business Line.

“This CBDT instruction is a welcome step. It is widely expected that in similar situations a uniform approach would be adopted by the tax department, much to the respite of taxpayers involved in identical transfer pricing disputes”, he said.

It is settled law that instructions are binding on the tax officer and have to be liberally construed in favour of taxpayer.

Giving respect to the same, this latest instruction should be followed by the tax department in true spirit, he said.

S.P.Singh, Senior Director-Transfer Pricing at Deloitte in India, said the latest CBDT instruction is a “very positive step” and it will send good signal to foreign investors invested in India.

However, CBDT needs to take similar type of action on other contentious issues such as royalty, management charges and advertising expenses that affect large number of companies operating in India.

The latest CBDT instruction only covered issues of capital infusion at a premium by overseas parents, he said.

The CBDT move is timely as several foreign multinational firms were looking at newer jurisdiction for locating their business, he said.