With the tribunal deciding in favour of the taxpayer in most TP disputes, it is time that CBDT introduces detailed guidelines on administration of transfer-pricing
The likelihood of a transfer-pricing audit in India is considerably high. In the event of a transfer-pricing adjustment, an appeal lies with the Commissioner of Income Tax (Appeals) (CIT (A)) and further appeals lie with the Income Tax Appellate Tribunal (ITAT), high court, and the Supreme Court with the judgment of the latter being binding. There is an inordinate delay in the litigation process to reach a binding decision. This along with the vast volume of companies that are audited annually results in a heavy backlog in the tribunal and courts. Effective October 1, 2009, a Dispute Resolution Panel (DRP) was constituted for speedy resolution of disputes involving foreign companies or companies with transfer pricing disputes.
Following the introduction of the DRP, the TP disputes are now divided between the DRP and the CIT(A), resulting in a mirage of reduced litigation. Going by statistics, the number of TP disputes adjusted in the Assessment Year (AY) 2011-12 was 2,353, making it 54% of the total number of cases and resulting in a total adjustment of R46,466 crore. The quantum of TP adjustments during AY 2008-09 exceeded R44,000 crore, which is a whopping 85% increase when compared with the earlier AY. However, starting AY 2010-11 a reverse trend has been recorded, showcasing a reduction of 22% in the quantum of adjustments when compared with AY 2009-10.
It is evident that India has a larger number of transfer-pricing rulings (over 1,800 reported as on date) than most other countries in the world. This will serve as a deterrent for promoting India as a good destination for FDI as multinational enterprises (MNEs) are wary of litigation as a means to settle disputes.
The current TP litigation trend reveals that a majority of the rulings are being pronounced at the tribunal level, which is the final fact-finding authority. However, astonishingly, out of 1,075 rulings that have been pronounced by the tribunals until May 2014, only 13% have been ruled in favour of the revenue authorities. This track-record of the revenue authorities at the tribunal-level definitely suggests a need for a paradigm shift in the approach being followed by the authorities during the assessment proceedings. Out of the total number of high court rulings, 86% of the verdicts were in favour of taxpayers, while only 7% were in favour of the revenue authorities.
The sector-wise dispersion of all cases is a reflection of a few sectors, especially the IT&ITeS sector, constituting the highest concentration of cases. The sectoral analysis indicates that 45% of the rulings relate to taxpayers from the two aforementioned sectors. While these sectors have contributed significantly to the Indian economy in terms of foreign exchange earnings and employment generation, they face the challenge of scrutiny by TPOs attributing very high margins to their business. Despite the number of TP disputes arising from the IT&ITeS sectors, trend analysis shows that 50% of the rulings relating to the IT sector and 40% of the rulings relating to the ITeS sector were in favour of the taxpayer.
The contribution by the IT/ITeS sectors to the GDP has increased from a nominal 1.2% in early 2000 to approximately 9.5% in FY15. India has emerged as the most preferred destination for outsourcing services in this sector, with greater volumes of cross-border transactions being undertaken between various multinational group companies. It is for this reason that the sector has gained immense importance from an economic perspective, and the significant TP disputes plaguing the sector have diminished our image and retarded the growth of the Indian economy.
Besides the IT&ITeS sectors, other industries facing considerable TP litigation include original equipment manufacturer (OEM), distribution, automotive, pharmaceutical, and chemicals.
It is interesting to note that even though tribunals are the final fact-finding authority, there are many matters that are being appealed before the high courts and have been successful in catching their attention too. This only points towards the fact that there remains an urgent need for clarity of jurisprudence in the field of transfer pricing.
Considering the fact that most of the decisions rendered by the tribunal are in favour of the taxpayer, it is time that CBDT introduces detailed guidelines on the administration of transfer-pricing, with a view to minimising the disputes and providing clarity to the taxpayers and department officials on complicated subjects like TP. The ITRAF occasional paper number 8, from where this column is excerpted, is an attempt to identify the issues and suggest possible guidelines for the benefit of the tax payer and tax administration.
While the Indian government repeatedly promises a stable and non-adversarial tax regime on public platforms, frequent legal changes, inconsistent interpretation of the law coupled with the backlog of unresolved disputes is always an issue being faced by global MNEs. Though India attracts FDI on other positive factors like the presence of a huge market, and the availability of skilled people, the hidden costs of litigation make India less attractive from the perspective of FDI. This has affected India’s competitive position in the international market.
The government is making an attempt to reduce TP litigation and bring clarity on taxation of transactions through the introduction of advance pricing agreements (APA), mutual agreement procedure (MAP) and safe harbour rules. While APA, MAP and safe harbour rules have been welcomed by the industry, the primary factor that can serve as a catalyst in increasing the MNEs confidence in doing business in India is the amendment of the archaic transfer-pricing rules.