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The litigation in  taxation matters is increasing on a rapid scale. However, where the transactions involves the foreign companies or their subsidiaries it is governed under the head of transfer pricing. The increasing participation of multi-national group in economic activities in the country has given rise to new and complex issues emerging from transactions entered in to between two or more enterprises belonging to the same multi- national group.

The profits derived by such enterprises carrying on business in India can be controlled by multi-national group, by manipulating the prices charged and paid in such intra-group transactions, thereby leading to erosion to tax revenues.

The whole procedure of the tax complicities are given under the Income Tax Act, 1961 and to the same the amendments are brought every year by the Finance Act, which brings the budget in the month of February.


The provisions of Transfer Pricing in India are governed by OECD (Organisation for Economic Cooperation and Development) guidelines and various other international guidelines related to that matter. Sometimes, the transactions between the parties are intangible in nature.

For Instance, the services of intangible supply chain. Under this service, the assessee provides the services which creates the goodwill of the associated enterprises in the market in order to built up the trust in the mind of their consumers. However, the calculation of Arms Length Price in these kind of transaction is quite difficult as it is not feasible to bring every record on table behind such services.

Usually, when the assessee having a corporate title enters in to an international transaction with his associated enterprises, he is bound to show the documents related to that transactions and all other documents have to be maintained, which needs to be verified by the accountant.

The tax dispute begins with the receiving of notice under Sec. 143(2), where the case of the assessee is selected for scrutiny by the income tax department. It follows with the intimation given to the assessee of such scrutiny.

The matter is then referred to the TPO (Transfer Pricing Officer) in order to calculate the Arms Length Price of the international transaction. Furthermore, the TPO will look in to the transaction by going through all the documents and the comparables taken by the parties. On the basis of all his calculations he will pass the TPO order which would either be the two mentioned below:

1. Enhance the Income of the Aseessee

2. Or, remains the same.

Simultaneously, on the basis of TPO order, the AO will pass the Assessment Order with the Demand notice to the assessee. If the assessee is not satisfied with the order he can file his objections and make an appeal to the DRP (Dispute Resolution Panel) within 30 days of passing of draft order. Alternatively, the assessee can also file an appeal before the CIT(Appeal)within the period of 30 days. Thus, both DRP and CIT (Appeal) works parallel to each other. Thus, as per the provisions of the Income Tax Act the assessee has two forums to make an appeal against the draft order i.e.

  • DRP(Dispute Resolution Panel)
  • CIT(A)(Commissioner Income Tax)(Appeals)

The forum of DRP was introduced by the Finance Act 2009, in order to combat the transfer pricing litigation in India. However, if the assessee is still not satisfied with the observations of DRP or CIT (A) he can make an appeal to ITAT, which is the last fact finding authority. Thus, if the matter involves the substantial question of law or the question of fact, the appeal can also be made to the High Court and the Supreme Court.

In transfer pricing matters, the most important concept is the calculation of Arms Length price for which various methods has been given. The most used methods are:

1. TNMM (Transnational Net margin Method)

2. Profit split Method

3. CUP method.

With the assistance of these methods and taking comparables in account the ALP of the international transaction is calculated.In the landmark case of Sony(India) , which is a wholly owned subsidiary ofSony(Japan) the ITAT Delhi held that the reimbursement made by the AE to the assessee should be a normal part of the operating profits of Sony(India). It also held that as per the OECD guidelines only the similar entities can be taken as a comparables to make a broad based comparison for the purpose of determining the Arms Length Price.


The reasoning behind the establishment of such authority is to know the tax liability in advance between the entities (one of them being non-resident) in order to avoid any tax conflict in the transaction between the parties at the latter stage.

It is an independent body headed by the retired judge of the Supreme Court of India.

When the question of taxability comes before this authority they will give the ruling as per the Indian legislations and bilateral agreements India have entered into with foreign countries.

This also gives an opportunity to the investors to structure their dealing, giving consideration to the tax to be paid out of such transaction. The ruling given by this authority is binding on both the parties i.e. the revenue department and the taxpayer. The time period of 6 months is given to the ITAT in order to give its ruling for the transaction undertaken or proposed to be undertaken.

However, when it comes to transfer pricing considerations AAR plays a major role at the initial level in order to determine the tax liability of the assessed in case they are entering in the markets of the foreign countries.

Complicated Issues involved in the working of AAR

1. The first contradicting issue that is involved with the working of the AAR is that, though the ruling of the Authority is binding upon the parties, still the parties can take an escape from them by taking the benefit of constitutional remedies given to them by the way of writ petitions under Article 32 & 226 of the Indian Constitution. Thus, it brings the ruling of the authority under questionable point and the purpose behind the establishment of this becomes discarded.

2. Secondly, the AAR can look towards the taxability of 2 kinds of matter i.e :

  • Already Undertaken
  • Proposed to be Undertaken.

The definition of the term “proposed to be undertaken” is not clearly defined under the act and there is no specific definition for it. However, it created complex situation if the matter is already pending before the ITAT.

3. Thirdly, when the matter which is proposed to be undertaken comes before the AAR, it gives the decision before the actual issue has arisen. Thus, AAR gives his decision without knowing the actual facts and circumstances of the issued that will involved in the case.

In the case of Maruti Suzuki , the assessee was the manufacturer of the cars under thebrand “Maruti Suzuki”. The contention of the revenue department was that use of the brand name and high AMP (Advertising, Marketing, Promotion) expenses would amount to international transactions. The High court applied the bright line test and held that firstly, the revenue department has to prove the existence of an international transaction. Secondly, whether the AMP expenses of the assessee is at par with the comparables or not. If it exceeds the comparables amount it would amount to be taxed and the income of the assessee can be enhanced by the department, if not it will not be considered as an international transaction.


The international transaction with the associated enterprises or with the parent company are done by their subsidiaries located in different countries. This process of opening the subsidiary company in the countries with the developing stage is usually done to get their work done with the help of cheap labours available.

Usually, in the country like India where the employees are ready to work at a very low salary because of the high unemployment rate, Thus, the holding companies of the foreign countries takes the undue advantage of such situation and establishes their subsidiary.

Apart from hiring the employees at a low rate they also tries to escape their ta x liabilities in the host country by taking advantage of the loopholes in the provisions of the income Tax Act and various bilateral and the multilateral treaties entered by the countries in order to avoid the income tax litigations as it not only involves the time and money, but also leads to un productivity which would hamper the growth of the economy.

There is no specific provision under the India tax Laws which governs the transfer pricing transactions as a whole. However, there are numerous ancillary provisions to govern such transactions are available.

The procedure of Arms Length Price derived by the taxpayer and the Transfer Pricing Officer is a main region of complexity in the income tax controversies. In a nutshell when a taxpayer provides the various services to its Associated Enterprises and Non- associated enterprises and the margins derived from such transaction is considered crucial by the TPO to determine whether such transaction with the Associated Enterprises was done with the motive of withholding the tax liability or not.

In many situations taxpayers are not able to satisfy their benchmarking with the various comparables and following this the Revenue authorities makes the adjustments on the whole margin computation of the taxpayer.

In order to save the tax payers from such situations the theory of proportionality is adopted by the Income Tax tribunals and the courts in India. In the case of Hindustan Unilever Ltd 80 . the tax authorities had filed a Special Leave Petition under Article 136 before the Supreme Court of India against the High Court order holding that the transfer pricing adjustment, if any, can be made only to the proportion of the AE transactions and no adjustment can be made to 3 rd party/ non-AE transactions.

In transfer pricing matters, the most important concept is the calculation of Arms Length price for which various methods has been given. The most used methods are :

1. TNMM (Transational Net margin Method)

2. Profit split Method

3. CUP method.

With the assistance of these methods and taking comparables in account the ALP of the international transaction is calculated.


It is important to remember the rules that are framed by Transfer Pricing regulations provides a procedure to the country to collects its share of tax from the foreign country and which are due on their part. However, the government should always keep this in mind that in the desire to collect the taxes they should not forget the problems faced by the enterprises in satisfying the regulation set up by their domestic law.

As per the guidelines issued by OECD the CUP method should be the first choice to calculate the arm’s length price rather than opting for other traditional methods such as TNMM and PSM. In India, we have no specific provision and we advocate the most appropriate method. Thus, the interpretation of this term is vague as every party opts the method which comes in their favour as the most appropriate method. However, in most of the cases as of now, the TNMM method is opted.

The way at which the globalisation is affecting the businesses and the aristocratic competitions in which the countries are competing with each other it could be easily summarised that the issue of transfer pricing would get interesting at rapid scale. We live in a dynamic environment where it is imperative for the enterprises to adapt the changes with the changing environment otherwise they would be left far behind.

Note :

1. Income Tax Rules, 2009: Section 92D of the Income Tax Act,1961 read with Form 3 CEB.

2. DRP is a collegium consists of three CIT’S (Commissioner of Income Tax) appointed by CBDT (Central Board of Direct Taxes).- income Tax Rules, 2006.

3. M/S Sony Communications Vs DCIT[ITA No.554/Delhi/2015]

4. Maruti Suzuki India Vs Commissioner of Income Tax (2016)381ITR 117 (Delhi)

5. OECD Transfer Pricing Guidelines for Multi National Corporations (MNC’S) and tax Administration –September 2010

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May 2024