Supreme Court has asked the finance ministry and Central Board of Direct Taxes (CBDT), the apex body in charge of administering India’s taxation system, to amend transfer pricing, or TP, laws if it wishes to bring domestic transactions under their ambit.

India’s TP rules currently cover cross-border transactions between related parties, such as the Indian arm of a foreign company and its overseas parent. They are silent on related party transactions between entities within the country.

The apex court’s ruling came in an order last week on an appeal filed by the income-tax (I-T) department in a case relating to pharma major GlaxoSmithKline (GSK) Asia. The issue centred around a transaction between GSK Asia and its service provider. The I-T department claimed the company and its service provider are related parties and asked for records and clarifications from the company. In this case, the I-T department sought to apply the same rules it applies for cross-border transactions between related parties. But the Supreme Court concluded in this case that the parties were not related and dismissed the special leave petition filed by the I-T department.

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But the observation made by the apex court that TP rules should be amended if the department has to apply the same rules to domestic transactions can widen the scope of India’s transfer pricing rules, if the finance ministry decides to modify the TP rules.

SSN Moorthy, chairman , CBDT, told ET no decision has been taken. “We are, at present, examining the Supreme Court’s directive. We have not taken any decision so far.”

TP Ostwal, who was a member of a committee that drafted the TP rules, said laws may need to be amended. “We need to study the practices prevalent in other countries before we amend the laws to include domestic transactions under the purview of TP rules. Most countries have structured certain formula to ensure related party domestic transactions do not escape tax net.”

The Supreme Court has observed that since the prevailing TP rules apply only to cross-border transactions, laws require to be changed if the tax payer is to be asked to maintain records and obtain an audit certificate from a chartered accountant authenticating that related parties’ domestic transactions are at arm’s length.

The Supreme Court has observed that domestic transactions are usually revenue neutral except when companies shift profit to a loss-making company. In some cases, profits are also shifted to areas in which incidence of tax is lower. In view of this, the apex court held that the Indian Income-tax Act needs to be amended to empower the assessing officer to make the sort of calculation in domestic transactions, as they do under the TP rules for cross-border transactions.

TP rules were first introduced in India in 2001 budget, with the objective of checking the erosion of revenue that may happen with the increasing number of cross-border transactions between related parties. Over 60% of global transactions are between related parties.

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