The transfer pricing mostly covers overseas transactions wherein Indian Subsidiaries provide back-office support services to the parent company which is outside India.
In this setup, the price charged by an Indian subsidiary is at an arm’s length i.e., same as the price it would transact with third parties.
The issue of transfer pricing litigation arises when the profit margin charged by an Indian company to its group company situated outside India is disputed by the Indian authorities.
A higher margin yields higher revenue for the Indian Company and attracts higher tax outgo.
The dispute pertaining to transfer pricing litigation are based on factual issues, such as comparable companies in the transfer pricing study, or the method adopted to determine the arm’s length price.
The findings of the Tax Tribunal on transfer pricing disputes are not interfered by the High Courts in appeals on the ground that Tax Tribunals are final fact-finding authority and that an appeal to High Court lies only on a substantial question of law.
However the Hon’ble Supreme Court while adjudicating batch of appeals on whether the arm’s length pricing decided by Income Tax Appellate Tribunal (ITAT) can be challenged before the High Courts has remitted the cases back to the respective High Courts to examine whether principles of arm’s length was followed by the ITAT and whether the findings of ITAT were perverse or not.
It is worth mentioning here that post above directions of the Hon’ble Supreme Court, alternative mechanisms such as advance pricing agreements (APAs) would surely see more prominence in the time to come.