The Changing Landscape of Transfer Pricing Litigation in India
In the Indian tax litigation landscape, transfer pricing has always been a contentious issue. Over the last two decades, India's transfer pricing has progressed substantially both in terms of developments within the legal framework as well as through related litigation, as Riaz Thingna, Grant Thornton Bharat LLP and Vaishali Mane, Chartered Accountant discuss in this expert focus video.
The Evolution of Transfer Pricing in India
The early years of Indian transfer pricing saw significant litigation as tax authorities aggressively scrutinised all forms of international transactions, with issues ranging from comparables to more complex economic concepts. Progressive measures such as the adoption of global best practices related to the OECD’s base erosion and profit shifting (BEPS) project, the introduction of safe harbour rules, advance pricing agreement programmes, additional guidance on mutual agreement procedure (MAPs), the introduction of risk-based transfer pricing references and non-transfer pricing risk parameters have reinforced transfer pricing’s prominence in Indian tax policy.
Riaz Thingna highlights the faceless assessment scheme in direct tax, which has been successful, although not yet applicable to transfer pricing regulations. It is anticipated that its eventual extension will bring more efficiency to the process.
Current Areas of Transfer Pricing Controversy in India
Discussing current transfer pricing disputes, he emphasises issues related to outbound intra-group service payments. The lack of clear guidance on benchmarking such transactions has led to disputes, often involving the disallowance of payments due to insufficient proof of service receipt and challenges in quantifying benefits.
The conversation also touches upon concerns about corporate guarantees issued by Indian parents for subsidiaries outside India. The varying judicial positions on whether these guarantees should be considered shareholder activities or subject to transfer pricing regulations add complexity to the issue.
The Indian Tax Authorities’ Treatment of Account Receivables and Comparables
Additionally, the discussion covers challenges related to outstanding account receivables. Mr Thingna notes that tax authorities often focus on notional interest on overdue balances, leading to disputes over determining arm's length prices for such outstanding receivables.
The dialogue concludes with insights into disputes regarding abnormal profit comparables. The absence of specific regulations for excluding comparables based on profitability criteria has led to contradictory views, creating an ongoing controversy.
Throughout the discussion, emphasis is placed on the steps taken by the Indian government, such as safe harbour rules and the APA programme, to reduce transfer pricing disputes. While there has been progress, challenges and uncertainties persist in the evolving landscape of transfer pricing litigation in India.
