Constitutionality of Transfer Pricing Directive 2081
Adv. Srijana Adhikari et al. Inland Revenue Department et al. (Writ no.: 081-WC-0045)
The petitioners filed a writ petition before the Supreme Court challenging the legality of the Transfer Pricing Directive, 2081 (2024) issued by the Inland Revenue Department. They argued that the Directive effectively introduces substantive tax obligations, definitions, and compliance requirements related to transfer pricing in transactions between multinational and related entities. According to the petitioners, although transfer pricing regulation is necessary in the context of globalization and cross-border business, such rules must be created through legislation enacted by Parliament, not through executive directives or delegated legislation.
The petitioners contended that the Directive violates Article 115 of the Constitution, which provides that no tax can be imposed except by law, and that the issue of substantive directive exceeds the authority granted under the Constitution. The Petitioners argued that by creating new legal obligations and expanding tax liability through an administrative directive, the Inland Revenue Department encroached upon the exclusive law-making power of the legislature. Therefore, they sought a court order to invalidate the Directive to the extent of its inconsistency and to direct the Government to enact proper transfer pricing legislation through constitutional procedures.
The Constitutional Bench of Supreme Court quashed the writ petition. The Court observed that while the petitioners raised constitutional issues, the judiciary cannot substitute itself for the legislative function. The responsibility to enact comprehensive transfer pricing legislation lies exclusively with Parliament.
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