Navneet Singal

The transfer pricing (TP) provision has come in to place in India fifteen years ago wef AY 2002-03. Since then a number of changes and amendments has been made in the provisions of the TP. It has been a matter of discussion since beginning that when a case should be referred by the AO to the TPO and what the liabilities of the TPO & AO after such reference. The uniformity of procedure of Transfer Pricing is itself a big challenge.

Initially, the CBDT had issued Instruction No. 3/2003 dated May 20, 2003 to provide guidance to the TPOs and AOs to operationalize the TP provisions and to have procedural uniformity. However, due to lot of changes over a span of time these instructions were replaced by Instruction No. 15/2015 which has been further replaced by Instruction Number 3/2016 recently dated March 10, 2016.

The gist of the instructions issued on March 10, 2016 can be provided as follows:

1. These instructions are applicable both on international transactions (ITs) and Specified Domestic Transactions (SDTs).

2. The letter through which reference is made by the AO must explicitly mention the transactions which are being referred.

3. Reference to the TPO by the AO

Where the cases has been selected for scrutiny on the basis of TP risk parameters : If the reasons or one of the reasons for selection of a case for scrutiny is a TP risk parameter, then the case has to be mandatorily referred to the TPO by the AO, after obtaining the approval of the Jurisdictional PCIT/CIT.

Where the cases has been selected for scrutiny on the basis of Non-TP parameters: These cases shall be referred to the TPOs only in the following circumstances:

a. Where the AO comes to know that the taxpayer has entered into ITs or SDTs or both but the taxpayer has either not filed the TP report or has not disclosed the said transactions in the report filed;

b. Where there has been an adjustment of Rs.10 Crore or more in an earlier AY and such adjustment has been upheld by the judicial authorities or is pending in appeal; and

c. Where search and seizure or survey operations have been carried out under the provisions of the Act and findings regarding TP issues in respect of ITs or SDTs or both have been recorded by the investigation Wing or the AO.

Recording of satisfaction by the AO:

In the both of above mentioned cases, the AO is required to provide an opportunity of being heard to the taxpayer if the issue is related to point no. (a) mentioned above or a case where he has declared that the ITs or SDTs in the TP report with certain qualifying remark to the effect that the said transactions are not ITs or SDTs or they do not impact the income of the taxpayer.

In case the taxpayer objects the applicability of TP provisions, AO is required to pass a speaking order so as to comply with principle of natural justice. If the AO decides in the said order that the transaction in question need to be referred to the TPO, he should make a reference after obtaining the approval of the PCIT or CIT.

4. Role of TPO

a. The TPO is empowered to determine the ALP of such other ITs also which comes to his notice during the course of the proceedings before him.

b. The TPO order should contain details of the data used, reasons for arriving at a certain price and the applicability of methods.

c. The TPO is required to keep a record of all events connected with the whole process of determination of ALP. It is required to keep separately for ITs and SDTs.

d. The TPO shall obtain the approval of Additional/Joint CIT or Deputy/Assistant CIT as the case may be.

e. The TPO is required to carry out the Compliance Audit of the Advance Pricing Agreements (APAs) entered into by the Board and the taxpayers.

f. The TPO is also required to play an important role in respect of Safe Harbour rules.

5. The determination of the Arm’s Length Price (ALP) should not be carried out by the AO in a case where the reference is not made to the AO. The AO must record in the Assessment Order that due to Board’s instruction on this matter, the TP issue has not been examined.

6. The AO has to compute the total income of the taxpayer in conformity with the ALP determined by the TPO.


  1. Introduction of risk based selection of cases rather than based on monetary threshold limits.
  2. Opportunity of being heard to the Assesse before referring the case to the TPO where there is a dispute regarding the nature of the transaction that whether it is an ITs or SDTs or not.
  3. The TP provision will come into play only where an ITs or SDTs impacts, or has the potential to impact, income.
  4. AO is not permitted to determine the ALP.
  5. TPO is empowered to determine the ALP of such other ITs which comes to his notice during the course of the proceedings before him.

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