Sections 92 to 92F contained in Chapter X of the
Income Tax Act, 1961 titled “Special Provisions Relating to Avoidance of Tax”
were introduced by the Finance Act, 2001 w.e.f. 1.4.2002 with a view to provide
an exhaustive legislative framework relating to the fair computation of income
arising from international transactions between associated enterprises (“AEs”)
having regard to the arms length price (“ALP”) [Central Board of Direct
Taxes, Circular No. 14/2001, 2001 252 ITR 65]. Before this amendment in
2002, cross border transactions were regulated under section 92 of the Income
Tax Act, 1961 (“the Act”). However, the said section was limited in its scope
and application and also employed undefined terms viz. ‘close connection’,
‘adjustment of profits’ and ‘estimation of reasonable profits’ etc.
For the purposes of computing income arising out of
international transactions, certain expressions occurring in the said sections
have been unambiguously defined. Section 92A(1) of the Act defines AEs as one,
which is directly or indirectly, managed and controlled by another. On a joint
reading of sections 92B(1) and 92F(v) of the Act, it emerges that an
“international transaction” would necessarily be an arrangement, understanding
or action between the AEs. The computation of the ALP must be determined by any
of the five methods provided in section 92C(1) of the Act viz. comparable
uncontrolled price method (“CUP”), resale price method, cost plus method,
profit split method and transactional net margin method (“TNMM”).
It must be noted that the primary burden in
determining the ALP is on the assessee himself using the most appropriate
method taking into account the nature of transactions, class of associates, or
any other relevant factor for that matter. However, if the assessing officer
has concerns about the method employed by the assessee in the determination of
the ALP, he may proceed to determine the ALP taking into consideration the
provisions of section 92C(3). In any such occasion, the assessing officer is
required under law to confront the assessee by issuing a show cause notice to
that effect. Having said that, the determination of the ALP is a complex
process and therefore, the assessing officer, if he considers it “necessary” or
“expedient”, is empowered under section 92CA to make a reference to the
Transfer Pricing Officer (“TPO”) for the determination of the ALP.
The role of the TPO comes into play only after a
reference under section 92CA has been made by the assessing officer. The TPO is
obliged under law to entertain any such evidence that the assessee may produce
including but not limited to any information or documents as also the relevant
materials that the TPO had gathered on his own. The TPO is then required to
determine the ALP in relation to international transactions on the basis of the
materials considered and send a copy of the order, in writing, both to the
assessing officer and the assessee. The assessing officer, then, after the
receipt of the order passed by the TPO is mandated to proceed the computation
of the total income of the assessee in conformity with the ALP determined by
the TPO.
This change was brought into effect by virtue of
Finance Act, 2007 w.e.f. 1.6.2007, before which the assessing officer would
proceed to compute the total income having regard to the ALP determined by the
TPO. The difference is significant in that after the amendment, the assessing
officer is bound by the order of the TPO in relation to the determination of
ALP and he is not obliged to give a final opportunity to the assessee (Sony
India Pvt. Ltd. vs. CBDT; 2007). Section 92CA (2) essentially requires the TPO
to serve a notice on the assessee so that the latter can produce on a specified
date any evidence in support of the computation made by him. A close reading of
this legal requirement would unambiguously reveal the recognition of the
principles of natural justice in proceedings relating to the determination of
ALPs.
[The author, Ashish Goel, is one of the contributors
at Breaking the Code of Criminal Procedure, and
can be reached at ashish.nujs@gmail.com]
What is the law when the TPO refused to accept methods employed by assessee, for example, the CUP. Is it against natural justice.
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteDear Anonymous,
ReplyDeleteIt is now established after Moser Baer's case, that the TPO cannot rule out the methods employed by the assessee if done according to the provisions of the IT Act. However, these are technical matters, and it will not be surprising if the Courts refuse to interfere with the decision of the TPO, only so far as the choice of the method is concerned.
Ashish