Can a court order resolving a tax dispute leave both the taxpayer and the tax authorities feeling vindicated? A recent ruling by the Delhi High Court has nearly managed this impossible task.

The high court has upheld the constitutional validity of an instruction issued by the Central Board of Direct Taxes (CBDT) that allows assessing officers to refer all cross-border transactions valued at over Rs 5 crore to a transfer pricing officer (TPO). Simply put, these instructions are neither arbitrary nor unreasonable, according to the HC order.

At the same time, the court has held that the transfer pricing officers findings are not binding on the assessing officer (AO) and that the taxpayer whose claims have been disputed has the right to present other relevant material before the AO for his consideration even after the TPO has given his opinion.

Transfer pricing refers to the price charged by an MNC to an associated enterprise for supply of goods and services. Since transfer prices can be used to shift profits out of India and hence avoid taxes, the tax department has regulations in place since 01 to check violations.

The law mandates MNCs to price their transactions with associated enterprises according to the arms length principle. A fairly detailed scheme to compute the arms length price has been set out in the income tax law. MNCs basically need to apply prices that independent enterprises would charge in identical transactions in the market place.

Practically speaking, in the recently concluded assessments, the AO is not disturbing the prices determined by the TPO, though an opportunity is given. The experience so far is that opportunity though given, not much consideration is made to the submissions made by the tax payer to the AO against the order of the TPO says Samir Gandhi, Tax Partner, Deloitte Haskins & Sells. The HC ruling will have wide ramifications while interpreting transfer pricing laws in India, reckon tax experts.