Economic Substance Is Evidentiary, Not Constitutive: Reconstructing the Jurisdictional Limits of Transfer Pricing in Vodafone India Services Pvt. Ltd.

Abstract

Tax authorities frequently commence transfer pricing audits with the arm’s length price enquiry, overlooking a prior jurisdictional question: whether the state possesses the authority to adjust the transaction at all. This unsettled sequence risks generating adjustments on transactions that never produced a taxable object. This prescriptive normative legal research reconstructs the jurisdictional limits of transfer pricing adjustments through the Vodafone India Services Pvt. Ltd. jurisprudence, employing a case approach to the ITAT Ahmedabad (ITA 565/Ahd/2017), Bombay High Court (385 ITR 169) and Supreme Court (341 ITR 1) rulings, combined with a statutory and comparative analysis of Article 18 of the Indonesian Income Tax Law and Minister of Finance Regulation No. 172 of 2023. The findings disentangle three commonly conflated questions: the normative scope of an international transaction is determined by concerted economic action irrespective of legal enforceability; the power to tax remains strictly bounded by the existence of a charging provision; and non-reporting of income does not preclude an arm’s length computation where the transaction class is inherently capable of generating income. From this separation, the study establishes that economic substance is evidentiary rather than constitutive, and proposes a six-layer Tiered Interpretation Model that places the arm’s length calculation last. The model offers a coherent reasoning framework for Indonesian tax authorities and the Tax Court to enhance legal certainty and proportionality in boundary-transaction disputes.