Tax Treaty Case Law around the Globe 2017

1. S. 84Introduction

Tax base erosion by multinationals is a phenomenon that is attracting the attention of tax administrations around the world. Transfer pricing between related parties is one of the means by which such base erosion is occuring. Introduction or strengthening of transfer pricing rules by tax administrations particularly in developing countries is the remedy uniformly prescribed. Since 2001, India has had transfer-pricing legislation that is largely based on the OECD Model and adopts the arm’s length standard in determining the transfer price. Of course, the introduction of transfer pricing has resulted in an explosion of tax disputes in India.

Normally, one would expect the revenue administration to complain of tax base erosion and justify transfer-pricing adjustments. But the case reviewed in this chapter is a case where it was the taxpayer that objected to a transfer pricing adjustment based on the plea that such adjustment would lead to erosion of the Indian tax base! Of course, there were many more innovative arguments on various other issues involved in the case but the argument relating to tax base erosion makes this particular case very topical.

The particular arran...