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Transfer Pricing – Practical Issues

Transfer Pricing – Practical Issues Series – 1/2021

Transfer pricing is one of the most litigated areas of International Tax around the World. There are so many controversies since the inception of the TP provisions in India in 2002. In this series, we shall be discussing key controversies under Transfer Pricing– Practical Issues Series

Query:

Q: Whether before a case is referred to Transfer Pricing Officer (TPO) under section 92CA(1) of the Income-tax Act, 1961 for computation of arm’s length price (ALP) Assessing Officer should prima facie demonstrate that any one or more of circumstances set out in clauses (a), (b), ( c) and/or (d ) of section 92C(3) of the Income-tax Act, 1961 are satisfied?

Q: Whether the Assessing Officer is required to record his opinion/reason before seeking the previous approval of the Commissioner under section 92CA(1) of the Income-tax Act, 1961?

Q: Whether before making a reference to the Transfer Pricing Officer under section 92CA(1) read with section 92C(3) of the Income-tax Act, 1961, is it is a condition precedent that the Assessing Officer shall provide to the assesse an opportunity of being heard?

Q: Is the approval granted by the Commissioner under section 92CA(1) of the Income-tax Act, 1961 justiciable? If so, can it be called in question in appeal on the ground that it was accorded without due diligence or proper application of mind?

Q: What is the legal effect of Instruction No. 3 of 2016 dated 20th March, 2016 issued by the Central Board of Direct Taxes on Transfer Pricing matters?”

Analysis

A perusal of the provisions of sections 92C and 92CA of the Income-tax Act, 1961 reveals that these provisions can be invoked by the Assessing Officer and he can proceed to determine ALP where he either finds the existence of the circumstances mentioned in clauses (a) to (d) of section 92C(3) of the Income-tax Act, 1961 or where he considers it necessary and expedient to refer the determination of ALP to the TPO. . There is no other requirement for invoking these provisions by the Assessing Officer.

 Assessing Officer is not required to demonstrate the existence of the circumstances set out in clauses (a) to ( d) of sub-section (3) of section 92C of the Act before referring the case of the assesse to the TPO for determining the ALP under section 92CA(1) of the Act for the reasons given hereafter:

  1. A close reading of sections 92C and 92CA of the Income-tax Act, 1961 reveals that proceedings in both the sections are quite independent of and distinct from each other and the proceedings under section 92CA(1) are not dependent on the proceedings under section 92C(3). This is due to historical reasons as two provisions were introduced at different times.
  2. The provisions of section 92C(3) confer powers on the Assessing Officer to determine the ALP himself where the circumstances mentioned in clauses (a ) to (d) of the sub section exist. In such cases, the Assessing Officer is not bound to refer the case of the assessee to the TPO.
  3. It would be sufficient for invoking provisions of section 92CA(1) if it is shown that there existed circumstances which prompted the Assessing Officer to consider it necessary or expedient to refer the computation of ALP to the TPO. No other condition is prescribed in the provision. Once it is shown that there existed circumstances on the basis of which the Assessing Officer could consider it necessary or expedient, the matter ends.
  4. Moreover it is mandatory for T.P.O. to determine arm’s length price in accordance with sub-section (3) of section 92C.
  5. It is not at all a condition precedent that the Assessing Officer shall provide to the assessee an opportunity of being heard.
  6. The view taken by us is also fortified by the decision of the Hon’ble Delhi High Court in the case of Sony India (P.) Ltd. v. CBDT [2006] 288 ITR 52.
  7. However, Hon’ble Gujrat High Court in case of Hitachi Hi Rel Power Electronics (P.) Ltd. v. Deputy Commissioner of Income Tax, Circle 2(1)(1), Ahmedabad [2021] 129 taxmann.com 304 (Gujarat) considering in detail the cases of Indorama Synthetics (India) Ltd.Additional Commissioner of Income-tax reported in [2016] 71 taxmann.com 349 (Delhi) and M/s. Veer Gems vs. Assistant Commissioner of Income-tax -Circle 7 and others [Special Civil Application No. 12648 of 2011 decided on 19th October 2011] and High Court of Bombay in the case of Vodafone India Services Pvt Ltd for AY 2009-10(WP No. 871/2014), Finally provided that in view of INSTRUCTION NO.3/2016 [F.NO.500/9/2015-APA-II], DATED 10-3-2016, the Assessing Officer is duty bound to follow the intrusion issued by CBDT before transferring the case to TPO for computation of Arm’s Length Price in case of international transaction and provide opportunities to the assessee and dispose of his objections in the following situations only:

(i)     where the taxpayer has not filed the Accountant’s report under section 92E of the Act but the international transactions or specified domestic transactions undertaken by it come to the notice of the AO;

(ii)    where the taxpayer has not declared one or more international transaction or specified domestic transaction in the Accountant’s report filed under section 92E of the Act and the said transaction or transactions come to the notice of the AO; and

(iii)   where the taxpayer has declared the international transactions or specified domestic transactions in the Accountant’s report filed under section 92E of the Act but has made certain qualifying remarks to the effect that the said transactions are not international transactions or specified domestic transactions or they do not impact the income of the taxpayer.

Concluding Remark

Now the controversy whether the assessing office is obliged to provide opportunities to the assesse before referring the case to Transfer Pricing Offices (TPO) for computation of Arm’s Length Price of the international transaction. All other allied queries also being discussed above stated case laws.

 

(Disclaimer: This content is meant for our clients or professional friends only for stimulating discussion on the subject matter not to frame any commercial opinion. All efforts are made to compile correctly with no guarantee of extreme accuracy)

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