Mr. T. P. Ostwal gave a brief introduction about the evolution of transfer pricing regulations. TP provisions, as introduced in India in the year 2001, have their origin in OECD Guidelines issued in 2001. Though the 1922 Act had certain transfer pricing provisions, it has gained importance only after introduction of section 92 by the Finance Act, 2001.
Highlighting the recent trends, he mentioned that the Income Tax department made transfer pricing adjustments of Rs. 70,000 crore in 2012-13, which reduced to Rs. 65,000 crore in 2012-13. The speaker expressed a hope that with the new government coming in, the scenario would change for the better.
The speaker welcomed the recent Vodafone transfer pricing decision by the Bombay High Court. In his view, the $ 490 Million tax dispute was based on a stand which was illegal from the beginning i.e. application of transfer pricing provisions relating to computation of income to issue of equity share capital, which is a capital transaction. This was a case of issue of equity shares by an Indian subsidiary to its holding company at a premium as per DCF valuation methodology prescribed under FEMA.
However, as per the TPO and DRP, the equity shares ought to have been valued at a much higher value. As per the tax authorities, the consequence of issue of shares by Vodafone India to its holding company at a lower premium resulted in subsidising the price payable by the holding company, which difference was sought to be taxed. Besides, this deficit was treated as a loan extended by Vodafone India to its holding company and periodical interest thereon was sought to be charged to tax as interest income as a secondary adjustment.
The speaker reiterated the fact that transfer pricing provisions cannot apply to issue of equity shares. Bombay High Court rightly held that Chapter X is a machinery provision to arrive at ALP of a transaction and not a computation provision. Since the issue of shares at a premium by Vodafone India to its nonresident holding company did not give rise to any income from an International Transaction, there could be no occasion to apply the transfer pricing provisions to adjust the income. Many other such cases, including Shell India, are pending. He hoped that the Government would accept the Bombay High Court order.
The speaker also referred to another case of Tops Security, wherein a similar stand has been taken by the tax authorities in a reverse situation, in respect of shares subscribed to by an Indian company in an overseas subsidiary, where the shortfall in valuation of shares of the subsidiary subscribed to has been sought to be taxed as income, besides being treated as a loan, and interest thereon sought to be taxed.
Mr. Ostwal was of the view that the secondary adjustments made by the Transfer Pricing Officers are not permissible, as there is no provision for such secondary adjustments under the law.
Thereafter, the learned speaker invited the attention to the amendments to section 92B(2), has deeming certain domestic transactions as international transactions. A transaction entered into by an enterprise with a person other than an AE will be deemed to be an international transaction if there exists a prior agreement in relation to the relevant transaction between such other person and the AE or the terms of the relevant transaction are determined in substance between them. For an international transaction, section 92B(1) provides that at least one of the parties has to be a non-resident. The amendment provides that section 92B(2) would irrespective of whether such other person, with whom the transaction takes place, is a non-resident or not. This amendment has overridden the decisions of the Mumbai Tribunal in the case of Kodak India Pvt. Ltd. andthe Hyderabad Tribunal in the case of Swarnadhara IJMII Integrated Township Development Co. Pvt Ltd.
The speaker referred to the Finance Minister’s speech proposing to permit use of multiple year data and interquartile range. The law had not yet been amended in this regard. This had the potential to reduce more than half of the transfer pricing litigation. He explained the logic in considering multiple year data while benchmarking and the issues faced at the time of assessments. The Tax department has been of the view that an average of multiple year data cannot be taken, and the determination of ALP should be based on single year data. Further, he explained the practice followed by other countries wherein inter quartile range is accepted by the respective countries.
He mentioned that even Advanced Pricing Agreement (‘APA’) has not been a success on account of various imperfections. There are 2 types of APAs – (1) Unilateral (2) Bilateral. Till now, only 4 to 5 APAs have been cleared by the department and all of them have been Unilateral APAs. Bilateral APAs would be more beneficial to the taxpayer as that would be approved by competent authorities of both the countries, with full tax credit in relation to the income in the other country. The new amendment in regard to rollback mechanisms in APA looks interesting and beneficial to the tax payer; however there is no clarity as to how it would practically work. What would be its effect on the existing litigation matters pending before the Tribunal or the DRP or the AO or on completed assessments?
The speaker commented that Safe Harbour Rules have been ineffective as the profit margins notified by the department in this regard are too high.
The learned speaker highlighted an important issue as to whether corporate guarantee qualify as an international transaction for transfer pricing purposes. Whether guarantees include letter of credit? In this regard, he pointed out to an important ruling of Delhi Tribunal in the case of Bharti Airtel, wherein it was held that corporate guarantee would have no bearing on profits, incomes, losses or assets and is hence not an international transaction. Provision of corporate guarantee is a shareholders function, and would therefore be on capital account.
The speaker touched upon certain amendments hoped for in the field of Domestic Transfer Pricing. He informed that safe harbour rules are expected for DTP. Besides, payments made by one company to another wherein both the companies are paying taxes at the same rates might be exempted from the regulations. This would certainly relax the rigours of domestic transfer pricing provisions.
In conclusion, the speaker pointed out that transfer pricing provisions have also now crept into the Companies Act 2013 (section 188) and Clause 49 of the Listing Regulations, in respect of related party transactions, which are required to be on an arms length basis.
