{"id":1576,"date":"2013-09-09T11:10:48","date_gmt":"2013-09-09T05:40:48","guid":{"rendered":"http:\/\/www.itatonline.org\/articles_new\/?p=1576"},"modified":"2013-09-09T11:11:30","modified_gmt":"2013-09-09T05:41:30","slug":"the-law-on-use-of-secret-comparables-in-transfer-pricing","status":"publish","type":"post","link":"https:\/\/itatonline.org\/articles_new\/the-law-on-use-of-secret-comparables-in-transfer-pricing\/","title":{"rendered":"The Law On Use Of Secret Comparables In Transfer Pricing"},"content":{"rendered":"
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\"Justice<\/div>\n

The Law On Use Of Secret Comparables In Transfer Pricing<\/p>\n

Hon’ble Dr. Justice Vineet Kothari, Judge, Rajasthan High Court
\nThe question whether the TPO is entitled to rely on secret comparables whilst determining the ALP of an international transaction has been the subject matter of great controversy. The learned Judge, who is also a qualified CA and CS, has carefully analyzed the entire law on the subject and explained it with great clarity. He has also provided perspective on the proper procedure that the TPO has to follow while determining the ALP\n<\/div>\n

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Link to download this article in pdf format is at the bottom<\/a><\/span><\/div>\n<\/p>\n

1. Introduction <\/strong><\/p>\n

In the present paper, I propose to deal with some of the cases decided in India in last couple of years by High Courts and Income Tax Tribunal on the issue which I am expected to deal, namely, the comparability of secret comparables by TPO while determining ALP.<\/p>\n

I should inform you, the fellow members, that there are very few decided & reported cases yet from higher appellate & Constitutional Courts like Supreme Court of India at Delhi and 24 High Courts, from one of which, Rajasthan High Court, Jodhpur from where I come.<\/p>\n<\/p>\n<\/div>\n

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But there are quite a large number of cases decided by Income Tax Tribunal, which has 40 Benches with 80 members strength in our country and the said Tribunal, being the final fact finding authority under the Income Tax Act, 1961, these cases which I would discuss now, throw considerable light on the issue.<\/p>\n

2. Ethics of Secret Comparables<\/strong><\/p>\n

<\/strong>Comparability analysis looks can be a laborious, difficult, time-consuming and, more often than not, costly exercise. Collecting information, analyzing all the data from various sources, documenting the analysis which Tax Advisories or Government appointed bodies do and income adjustments are all steps that require time and money. The aim should be to ensure that the compliance burden and costs borne by a taxpayer to identify possible comparables and obtain detailed information thereon are reasonable and proportionate to the complexity of the transaction. But that alone cannot be a reason for the dilution of comparability, permissible in theory.<\/p>\n

Taxpayers and tax administrations should exercise fair judgment to determine whether particular comparables are reliable or not.<\/p>\n

In my submission, allowing of income adjustments by determining ALP<\/em><\/strong> with comparison with secret comparables or cherry picking is not a very a healthy assessment practice. The principles of natural justice, fair play and equity does not permit such practices even in tax jurisprudence<\/em><\/strong>. But it appears that with changing times, borderless trade, software technology and human ingenuity helping tax evasion may justify this & with even legislative prescriptions & permissiveness, this concept may gain the status of an established practice. The data bank of tax administrators has gradually increased to a level and with constant pouring in of such information in public domain & secretively both, the development of law will take place. Of course, the assessee company or PE of MNE is given the opportunity to rebut such comparability with other ALPs but the tug of war between tax payer and tax gatherer in this regard generally ends in favour of tax gatherer and the cost of litigation for the tax payer to establish his credibility of declared price or income is generally a negative factor. <\/p>\n

That is why we the tax Judges in such Conferences like the 4th Congress of IATJ should discuss and guide the Tax Administrations worldwide for a more healthy, congenial and uniform system of tax assessments in the perspective of international trade, tax laws and double taxation avoidance treaties under OECD model law and UN Model laws, which also do not favour use of secret comparables, without allowing an opportunity to tax payer to distinguish or rebut those comparables.<\/p>\n

Developed countries, such as the US & UK<\/strong> have an official policy of not using secret comparables. In Australia and Netherlands<\/strong>, where we have all assembled, under specific judicial pronouncements, secret comparables are not allowed. However, a few other countries such as Japan, France, China, Germany and India<\/strong> permit use of secret comparables. Mexico<\/strong> specifically allows such use. <\/p>\n

In Japan, the latest legal position<\/strong> as per site of TPA Global, as per the requirements under Article 22-10(1) of the Enforcement Regulation for the Special Taxation Measures Law, if the taxpayers are unable to provide those documents in a timely manner upon request at the time of transfer pricing tax audit, they can trigger the tax examiner’s authority to collect transactional data from comparable independent firms to use as a “secret comparable” for the taxpayer. The information that may be requested by the NTA includes details of capital relationships, inter-company transactions, business activities, financial performance, method selection, search process and comparables selected.<\/p>\n

Where the tested party is located in Japan, there is a requirement for comparables from the Japanese market. Detailed information and data on Japanese companies is available from a number of Japanese and regional financial databases, such as ORBIS etc. from Bureau van Dijk. There is a risk that secret comparables may be used in cases where the taxpayers do not prepare transfer pricing documentation.<\/p>\n

The Paris Court of Appeal<\/strong> ruled in favour of Nestle<\/strong> in the case of Nestle’s French subsidiary, Nestle Enterprises against the Minister of Economy and Finances (case no. 12PA00469) in relation to the use of secret comparables as per the French Tax Code article 57.<\/p>\n

As per French Tax Code<\/strong> article 57, the tax authorities are allowed to use secret comparables in assessing the arm’s length range of a taxpayer. In this case, the French tax authorities have used comparable cash pooling operations of three major groups listed on the French Stock Exchange. The arm’s length compensation has been set at 0.5% on the borrowed amount of the cash pool at the end of the previous three financial years. As a result, the tax authorities performed adjustments to the tax base of the corporate income tax rate of 2002, plus the relevant penalties and interests.<\/p>\n

Nevertheless, the court of appeal ruled that the tax authorities failed to use a valid comparable due to the fact that the three major groups were selected without any indication of the company names, terms and conditions of the cash pool agreements and if the guarantee of the selected comparables are comparable to Nestle Enterprises. Therefore, court of appeal considered that secret comparables cannot be used as per article 57<\/strong>.<\/p>\n

Recently, in India, the Organization of Pharmaceutical Producers of India (OPPI) proposed a restriction on use of secret comparables by TPAs in Budget 2013. The Pharmaceutical industry is closely governed by Patent Law and their financial data are closely related to the production of their patented products and, therefore, analysis of secret comparables in their case, on the one side has great revenue fetching scope and on the other side misuse of secret comparables at the same time.<\/p>\n

Some Jurist rightly & aptly said, “<\/strong>While death & taxes, both are inevitable, being taxed to death is not<\/em><\/strong>”<\/strong>. Yet another saner sense pronounced, “<\/strong>The tax collection from subjects should be like collection of honey from the bees – gradual & drop by drop<\/em><\/strong>”. <\/strong><\/em>How true it is these days – is for all of us to ponder.<\/p>\n

3. Some Decided Cases of High Courts of India.<\/strong><\/p>\n<\/p>\n