The recent judgment of the Bombay High Court in the case of Vodafone with regard to share premium has brought back focus on the much discussed ''aggressive" approach of tax authorities. In this case, the plea of the revenue department that TP rules are in the nature of a charging provision or that a transaction of a capital nature can give rise to a chargeable income on the basis of a perceived 'benefit' derived by a related party has not found judicial approval. The judgment reaffirms faith in the judicial system.
More than the nature of the dispute, the judgment evokes public debate on the approach of the revenue authorities on TP issues. There is a larger question of looking at the experience of more than a decade of TP audits in India. While the gains to revenue in real terms might not be ascertainable, it is well known that the TP audits have resulted in increased litigation at various stages.
TP is essentially an economic and business issue, rather than a legal one. The domain knowledge of business, its dynamics and market practices are necessary to address the TP issues. Perhaps, the legal acumen of tax authorities has to be backed by requisite expertise in this area to achieve the desired results.
A TP audit seeks to test the rewards which related entities get from intra-group operations by comparing these with that derived by unrelated entities. This requires an analysis of a host of information and relevant data concerning business operations. The tax authorities believe the relevant information is often withheld from them, leaving no option other than taking a view on the basis of available data. Such an exercise leads to hardships for the taxpayer, bad publicity for the tax department and avoidable litigation.
There is a need to minimise the number of audits by risk-profiling the taxpayers and providing a longer time frame for TP audit. One way of doing this could be delinking of TP audit from time-bound assessments.
Perhaps it is the for different stakeholders, tax authorities, corporates and tax professionals to review their approaches to this complex issue of transfer pricing and be more transparent, pragmatic and reasonable.
(The views expressed are personal)
GC Srivastava
Former Director General of International Taxation, Department of Revenue, Ministry of Finance
Former Director General of International Taxation, Department of Revenue, Ministry of Finance
