Recently CBDT instructed vide Instruction No. 5/2011 dated 30 March, 2011 to Assessing Officers (AO) and the Transfer Pricing Officers (TPO) to look into technical evidence involved in a tax or transfer pricing case by seeking assistance in the form of opinion from technical experts in the relevant subject matter for expeditious disposition of such cases especially where there are substantial amounts of taxes at stake. This instruction follows from the directions provided by the Supreme Court in its ruling in the case of CIT v.Bharati Cellular Ltd. [2010-TI1-05-SC-INTL] wherein the Supreme Court emphasized on the need to rely upon the opinion from technical experts in cases involving complex technical matters so that Appellate forums are able to “decide the legal issues based on the factual foundation” of a case. The CBDT Instruction seeks to set out a broad framework on how technical experts can be consulted to provide their opinion on technical matters involved in a tax or transfer pricing case.
The Supreme Court (“the Court”) in the case of Bharti Cellular Ltd. (“the case”) directed the CBDT to issue directions that in cases involving complex technical issues and substantial monetary amounts, the Revenue should seek opinion of technical experts and bring on record technical evidence, in addition to the evidence placed before the Revenue officers. The case did not involve any transfer pricing matters but rather dealt with the issue of applicability of provisions in the Indian Income Tax Act, 1961 relating to tax deduction at source on interconnection charges paid by cellular companies for availing technical services. In pronouncing its ruling, the Court emphasized on the need to involve technical experts in reviewing complex technical evidence so that Appellate forums can decide on legal issues based on their factual foundation, thereby enabling proper disposal of such cases in a timely manner.
Following the Court’s directive, the CBDT issued an Instruction to its officers, the key provisions of which are as follows:
• The AO / TPO should frame assessments only after bringing on record appropriate technical evidence that may be required in a case.
• The process of identification of such cases and initiation of the proceedings to obtain the technical evidence should be taken up well in advance before the date of limitation.
• The officer concerned should bring the cases to the notice of the relevant Chief Commissioner of Income-tax (“CCIT”) / Director General of Income-tax (“DGIT”), who will look into the complexities of the technical issues and monitor the progress of the case and, if required, assist in obtaining the opinion of the technical experts in the relevant field of expertise.
• The evidence so gathered shall be made available to the assessee and reasonable opportunity should be provided before the assessment order is passed.
In addition, the Instruction provides that after a reference is made to an expert in the above manner, the CBDT should be provided with the following information:
a. case name and assessment years at issue;
b. a brief description of the technical issue involved;
c. the name and address of the expert; and
d. the tax effect.
Conclusion – The guidance set out in the Instruction of the CBDT is extremely welcome especially in the context of tax and transfer pricing cases which are fact specific and often involve complex technical / industry issues. As a result, an opinion from technical / industry experts would help Appellate authorities understand the issues better and accordingly dispose off the cases in a timely manner based on the factual merits of the case.
Though the Instruction recognizes the need for involving technical experts in a tax / transfer pricing case, there is still more clarity required on matters such as how such cases would be identified, who would be the experts, for what matters expert opinion can be sought, what would be the extent of involvement of the CCIT / DGIT in deciding on the experts, would the opinion sought be binding on all the parties involved in a case, would it be mandatory to seek such an opinion and in what circumstances will the seeking of expert opinion be restricted only to AO / TPO level etc.
There is also a need for the CBDT to set out parameters for selection of experts. Going by international experience on use of experts, a technical expert should typically be a specialist in the technical subject, one whose knowledge of the subject matter is beyond any question and who is able to provide his opinion in an unbiased manner in relation to a case. Seeking expert opinion on technical matters is in line with the practice followed in some overseas jurisdictions (US, Australia, etc.) although in those jurisdictions it is not only the Revenue, but also the taxpayer who may seek expert opinions.
As Indian Courts grapple with more tax and transfer pricing cases involving complex technical evidence / issues not faced before, it becomes even more imperative to rely on opinions of technical experts so that such cases can be disposed of based on their merits and in an expeditious manner.