Ruling of Bombay High Court on maintainability of writ petition on transfer pricing matter

 

This Tax Alert summarizes a recent ruling by the Bombay High Court (HC) in the case of Vodafone India Service Private Limited (taxpayer), challenging the jurisdiction of the transfer pricing officer (TPO) to compute arm’s length price (ALP) in case of transactions not referred to him by the assessing officer (AO). The taxpayer had filed a writ petition before the HC to quash the transfer pricing adjustment of INR 8,500 crores (USD 1330 Million) made by the TPO. The taxpayer claimed that the TPO did not have jurisdiction to determine ALP of transactions relating to sale of call centre business and assignment of call options.

The HC dismissed the writ petition of the taxpayer by ruling that the TPO had jurisdiction to identify and determine arm’s length price of transactions not referred to him by the AO nor reported by the taxpayer in the Transfer Pricing Accountant’s Report. The HC held that the taxpayer has more than one alternate remedy available under the Indian Tax Law (ITL). The HC further held that the taxpayer is entitled to challenge not merely the determination of the ALP, but also the TPO's conclusion that a particular transaction is an international transaction before the Dispute Resolution Panel (DRP). Alternatively, the taxpayer can wait till the final assessment order is passed without raising any objections upon the receipt of the report from the TPO and challenge the same before the Commissioner of Income Tax (Appeals) [CIT (A)]. From the order of the DRP or the CIT (A), the taxpayer is entitled to file a further appeal before the Income tax Appellate Tribunal (ITAT). These appellate authorities are entitled to go into all questions of law and of fact. Therefore, the remedy provided by the statute should be availed of and not by way of a writ petition to the HC.

The HC has purely decided on the jurisdiction of the TPO and maintainability of the writ and has not discussed on the merits of the transfer pricing issues involved in the writ petition. The HC has held that the appellate authorities should under the Act decide on the issues involved with regard to the transfer pricing adjustment made by the TPO.

The ITL provides for a comprehensive definition of the term “international transaction” and also deems certain transactions with persons other than AEs to be an “international transaction”.The HC concluded that whether the transaction of sale of call centre business and assignment of call options are indeed international transactions or not, should be decided by the Indian tax authorities under appropriate proceedings. The HC has not decided on the merits of the transfer pricing issues involved in the writ petition. Hence, the controversy is not likely to be settled anytime soon.

Before coming to its conclusion, the HC has referred to and reiterated well settled propositions laid down in number of past SC rulings under income-tax law. The HC has also reiterated that there may be exceptions to the general rule of non-maintainability of writs where alternate remedy exists i.e. circumstances where HC may entertain writ despite existence of alternate remedy.

The transfer pricing enforcement environment in India and the challenges around traditional dispute resolution avenues under the ITL, have often been triggers for taxpayers to consider constitutional remedies such as writs before the HC. In addition to constitutional remedies, which need to be evaluated having regard to specific facts and circumstances, taxpayers may also need to consider a more proactive approach to controversy management and dispute resolution early in the lifecycle of an audit. In addition to relying on domestic tax law appeal and litigation, taxpayers should consider use of treaty-based competent authority proceedings and the Advance Pricing Agreement mechanism, where appropriate.