Clear the air on transfer pricing

As transfer pricing is dependent on various business, economic and non-fiscal factors, objectivity and uniformity is missing during the application of transfer pricing regulations. Taxpayers are unsure how tax authorities will deal with a given issue, as different officers may deal with the same issue in different ways; even the same tax officer may take contradictory decisions for different tax years. One possible reason for this situation is the absence of the tax department's declared position on contentious issues. As a result, decisions become person-oriented rather than institution-oriented. This, obviously, is not an environment conducive for growth of business.

The question is: how do we get certainty? In several countries, tax assessment involves negotiation between tax authorities and taxpayers; the consequent solution being honoured as long as the facts and law remain the same. In order to clarify the government's position on tax issues, several countries such as the US and Australia issue circulars and so on, which are not merely reiteration of the provisions of law but go beyond and explain them with examples. Unfortunately, this isn't so in India due to various reasons.

One has to look towards judicial pronouncements for certainty, which consumes a lot of time, cost and effort. Even this may not ensure certainty, as amendments with retroactive effect may be introduced by the Government to clarify its understanding. Hence, there is need to look for a solution that is acceptable to the authorities and judiciary on one hand and to the taxpayer on the other; additionally, it should be in line with the international approach.

The Organisation for Economic Co-operation and Development and the United Nations have been active in developing an internationally acceptable approach on transfer pricing. Due to its growing economic strength, India's views on tax issues are gaining recognition from both the organisations. The OECD's commentary on the Model Tax Convention highlights India's positions wherever they differ from its position. This provides certainty on several tax issues. The OECD Transfer Pricing Guidelines for Multinationals and Tax Administrations (the Guidelines), which have been accepted by many countries as part of their regulations, does not include the views of countries like the Model does.

In several cases, the various appellate authorities have referred to the Guidelines while making conclusions. Recently, in the case of the Commissioner of Income Tax vs. EKL Appliances Ltd, the Delhi High Court relied on the Guidelines to adjudicate on the transfer pricing issue. The High Court held that as provided in the Guidelines, barring some exceptional cases, tax administrations should not disregard the actual transaction or substitute the actual transaction with another transaction.

However, court decisions do not provide any certainty that transfer pricing officers will accept the interpretation given in the Guidelines. This is because India has not declared its position on the Guidelines. Any move by tax authorities to publish their observations on, or objections if any to, the Guidelines will go a long way in reducing litigation. If this is not possible for some reason, the next best administrative solution would be to ensure coordinated and consistent action by tax authorities. Any approach will find acceptability only if it is driven not solely by revenue considerations but also by genuine efforts to find internationally acceptable solutions.

S.P. Singh is Senior Director and M. Fahad Khalid is Deputy Manager, Deloitte Haskins & Sells.

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