CA Sandeep Tiwari
In the recent past, Central Board of Direct Taxes (CBDT) has issued an instruction No. 3/2016 (Instruction) in perspective of the international transaction or specified domestic transactionto be referred by the Assessing Officer (AO) to Transfer Pricing Officer (TPO). The instruction ushered new guidelines for implementation of Transfer Pricing Provisions for referring international transactions or specified domestic transaction to the TPO subject to the approval of jurisdictional Principal Commissioner of Income Tax (PCIT) / Commissioner of Income Tax (CIT).
Along with the other important guidelines, the instructionalso depict that all the cases selected for scrutiny, on the basis of transfer pricing risk parameters such as if a taxpayer was subject to a transfer pricing adjustment exceeding Rs 10 crores in prior years etc., the AO would mandatorily refer the case to the TPO after obtaining approval of jurisdictional PCIT / CIT.
The instruction also guides about the cases which are selected for scrutiny on non-transfer pricing risk parameters but also having international transactions or specified domestic transactions shall be referred to the TPO in the following circumstances:
(i) where the AO notes international transaction or specified domestic transaction entered by assessee, but no accountant’s report filed by assessee or such transaction not disclosed by assessee;
(ii) TP adjustment of Rs. 10 crore or more made in earlier Assessment Year has been upheld by judicial authorities or is pending in appeal;
(iii) search & seizure / survey operations carried out & findings have been recorded regarded Transfer Pricing issues by Investigation Wing / AO; additionally, cases involving Transfer Pricing adjustment in earlier Assessment Year that has been fully or partially set aside by Income Tax Appellate Tribunal, High Court or Supreme Court, should also be referred to TPO.
Similarly, the instruction states that the AO must, as a jurisdictional requirement, record his satisfaction that there is an income or a potential of income arising and/or being affected on determination of arm’s length price of an international transaction or specified domestic transaction before seeking approval of the PCIT or CIT for making reference to the TPO in underlying situations as cited below:
(i) no accountant’s report filed by assessee, but international transactions or specified domestic transaction entered by assessee have come to the notice of AO;
(ii) taxpayer has not declared one or more international transaction/specified domestic transaction in Form 3CEB which has come to the AO’s notice;
(iii) where transaction is declared in Form 3CEB with qualifying remarks to the effect that such transaction is not international transaction or specified domestic transaction or it does not have impact on taxpayers income.
In case where taxpayer objects to applicability of Chapter X provisions in these three situations, the AO has to pass speaking order after considering taxpayer’s objections. While passing the order the AO has to explicitly mention all the relevant international transaction or specified domestic transaction in letter of reference to the TPO.
Further, where international transactions benchmarked on entity level and cases is selected for scrutiny based on Transfer Pricing risk parameters pertaining to one of more transaction, then all international transactions to be referred to the TPO, except those about which the AO has decided not to make a reference.
Keeping in view the above regulations, it is clear that while making reference of international transaction or specified domestic transaction to the TPO, the jurisdictional AO has to mandatorily record reason and pass a speaking order.
However, in spite of the mandatory requirement by way of the instruction, recently the AO deviated the same and has referred the matter[1]to the TPO without passing a speaking order.
The aggrieved taxpayer filed an application[2] in the Hon’ble High Court of Gujarat at Ahmedabad(Court) wherein it was pointed out that despite the fact that taxpayer filed his reply pursuant to the notice issued by jurisdictional AO, the matter was referred to the TPO without affording any opportunity of hearing or passing any order recording reasons as to why the matter is required to be referred to the TPO.
Having regard to the submissions advanced by the learned counsel for the taxpayer, the Hon’ble Court has given an ad-interim relief to the taxpayer. In its order, the Court has restrained the TPO from proceeding further pursuant to the notice pertaining to the matter referred to him by Jurisdictional AO.
It would be interesting to see the repercussion of the order of the Hon’ble court regarding instruction related to guidelines pertaining to the implementation of transfer pricing provision for reference of international transaction/specified domestic transaction in ensuing assessment years.
Information for the editor for reference purposes only
[1]Alpha Nipon Innovatives Ltd Vs DCIT
[2] Special Civil Application No. 7720 of 2016
( Author can be reached at sandy123tiwari@gmail.com)
Very interesting, as all you with procedure before the department that no one want to take risk whatever causes or hardship face by the assessee. CBDT issued instructions or circulars to reduce the ambiguity of the applicability of the provisions of the Act but the official never take pain understand the correct meaning. They follow the system this is the main problems.