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Move court only on question of law in transfer pricing cases: High Court
July, 06th 2018

In what could impact several ongoing disputes over transfer pricing, the Karnataka High Court ruled that courts should be approached in such cases only if there is a substantial question of law. Companies and revenue officials are approaching high courts when they don’t agree with facts observed by the income tax tribunal, the court observed.

Issues like a dispute over the methodology used for arriving at the tax amount or the facts observed by the tribunal should not be the reason for approaching the high court, it said. “The appeal (related to transfer pricing cases) cannot be entertained at the instance by either the revenue or the assessee (companies) and the exercise of fact finding or ‘Arm’s Length Price’ determination or ‘Transfer Pricing Adjustments’ should be allowed to become final... at the hands of the Tribunal,” the court order read.

Industry experts said the court order would impact all the transfer pricing disputes, but mainly those around advertising, marketing and promotional (AMP) expenses. “The judgement has held that matters relating to selection of comparables and filters don’t involve a substantial question of law for high court to intervene. The impact of this would be on most of the ongoing transfer pricing disputes involving selection of comparables or filters. Even AMP cases where the dispute involves comparables would be impacted,” said Ajay Rotti, partner at Dhruva Advisors.

Several MNCs in India are already battling tax demands on their AMP expenses. Under the AMP, the tax department is claiming that if a multinational spends more money on advertising, it is creating a global brand and not merely advertising a product sold in India. The whole premise of the argument is on comparables where the tax department compares a company’s figures with those of another and arrives at a decision. Like in the case of Maruti Suzuki, the department is comparing the AMP with that of rival automakers including Mahindra & Mahindra.

In most cases, the dispute between the companies and tax department is around how much tax is to be paid. Legal experts said the court order could even change the landscape of transfer pricing issues. “This could be a relief for many taxpayers and companies as the tribunal would become a final authority in such cases. However, it would be interesting to see till what extent would the other courts take cognisance of the judgement and whether the Supreme Court upholds the judgement,” said Amit Singhania, partner at Shardul Amarchand Mangaldas & Co.

Transfer pricing has been a huge pain point for several multinationals. It mainly deals with taxation on transactions between multinationals based in India and their businesses outside India. Industry trackers said this judgement can also give a push to the government’s Advance Pricing Agreements (APA), whereby many multinationals may look to get certainty on future tax rates. In July 2012, the government introduced the APA programme, which allows multinationals and revenue authorities to negotiate the rate at which tax is to be paid for the next few years and avoid transfer pricing disputes.

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