High Court Rules Against Coca-Cola in Transfer Pricing Case
M Padmakshan
Economic Times
January 6, 2009

MUMBAI: The Punjab & Haryana High Court has ruled against Coca-Cola India's contention that the proof of profit transfer outside India is a precondition for applying transfer pricing rules.

Coca-Cola had approached the high court after it was served a notice on transfer pricing. The soft drink company had an agreement to offer advisory services to Britco at the rate of cost plus 5%. Coca-Cola's main contention was that transfer pricing rules cannot be applied in the absence of prima facie evidence of profit transfer outside India.

The high court said that India's transfer pricing rules can be applied to any cross-border transaction between associated enterprises, irrespective of profit transfer outside India. The court said the only requirement is income generation in a cross-border transaction and income has been computed at arms length.

Coca-Cola told the court that transfer pricing rules were meant to check profit erosion outside India and therefore could not be applied in cases where there is no prima facie evidence of profit transfer outside the country.

The high court did not accept this view. It held that existence of a cross-border transaction and computation of the resultant income at arm's length price are sufficient grounds for applying transfer pricing rules.

According to Coca-Cola, the transfer pricing provisions have been incorporated in the Income-tax Act by the Finance Act 2001 and the applicability of these provisions has been limited to situations involving profit diversion outside India.

There is no material evidence to show that profits have been diverted outside India, the company said. The court said that it is the prerogative of the income-tax department to issue such a notice and expressed its inability to intervene in the matter.

Coca-Cola was assessed under I-T Act in 2004 for the year 1998-99. The dispute arose after the income-tax department concluded that the income had escaped assessment under the Income-Tax Act.

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