How to read this article-:
1. This article is structured under following headings
Background-: Nowadays, a reference to TPO is made by in a mechanical manner once the transaction is above Rs. 15 crores.
Why this article-: A change has taken place in the manner a case can be referred to TPO.
My Personal Conclusion-: The ITAT Mumbai [#] has given a land mark decision.
Points considered for forming conclusion-: As the name suggests, it is the analysis of the background material.
Basis of conclusion -:It is the background material on which a conclusion is formed.
2. The reason for this opening paragraph is to equip the reader to plan his order of reading. Invariably, it happens that, each of the reader is at different level of maturity and ha.s different priorities at different times.
3. This article is updated upto 21 November 2015.
4. Those practicing on the international taxation may be aware of the fact that, in view of CBDT Inst no 3/2003[E] and decision of ITAT-SB [C], ALL the transactions above Rs. 15 crores are being referred to TPO for scrutiny and benchmarking.
5. Eventhough, in 2001, when the Transfer Pricing regime was brought on statute book, it was explained that these provisions are for curtailing the tax avoidance.
6. There is a wide spread perception that, the said regime has been used, left right and center for tax recovery by the IT Dept.
7. Huge tax demands have been issued and recovered by IT Dept.
Why This Article-:
8. Recently, ITAT-Mumbai in the case of TCS dated 4-November-2015 [date of hearing concluded 30-July-2015] has ruled in favour of assessee and a path breaking decision is rendered to set into motion checks and balances that the cases be referred to TPO to meet the original objective of curtailing tax avoidance.
9. CBDT vide its instruction 15/2015 dated 16 October 2015 [D] has inter-alia issued instructions which partially address the above issue
10. It is important to refer to above dates because the instruction 15/2015 of CBDT is almost a month before the said decision was rendered but the hearing of the case stood concluded in July 2015 itself.
My Personal conclusion-:
11. ITAT-Mumbai has delivered a landmark judgement.
12. CBDT has also taken pro-active steps to align itself to the philosophy of referring the case to TPO.
13. CBDT has fallen short in compliance of the judicial pronouncements of Bombay HC in Vodafone case [B].
14. One can compare the requirements of Bombay HC in Vodafone case with the procedure for income escaping assessment where the assessee can object to the proceedings u/s 147 / 148 and the AO is under obligation to dispose off the objections.
15. Very recently, taxsutra and Deloitte has published a study report titled as “Transfer Pricing Disputes Trends Report 2015 with a forward by Senior Advocate Arvind P. Datar. It runs into only 44 pages. The audience may find it relevant for reading.
Points considered while coming to a conclusion-:
Situation as of today may be summarised as follows:
16. For more than a decade or so, the instruction 3/2003 as confirmed by ITAT-SB in the case of Aztec soft has held the field. It authorises the AO to refer the case with international transaction to a TPO without any responsibility on him to prove the need thereof.
17. Bombay High Court in the case of Vodafone has held that
Where assessee raises a dispute that there is no income arising and/or being affected or a potential of an income arising and/or being affected by an international transaction on determination of ALP, Assessing Officer has to deal with such issue at very threshold before referring matter to TPO for determining ALP
18. It would be apt to re-produce a paragraph of judgement of Vodafone case
52. The assessee is entitled to have its preliminary objection (against chargeability of the alleged short fall in share premium) dealt with. Not a single authority has so far dealt with this issue and even the learned counsel for the revenue did not address us even briefly on merits of this controversy to show a plausible prima facie defence ( though the revenue sought to justify its stand in the affidavit-in-reply and in the written submissions after conclusion of the oral argument) Though the petitioner submitted that we decide the issue on merits, we have not done so for the present for all the reasons pointed out above. Therefore the submissions made on merits are not being considered by us and left open to be urged before the DRP for consideration by the DRP, but even proceeding on the basis that transaction in question is an international transaction since the preliminary objection raised by the petitioner raises a question of law and does not involve disputed questions of fact and having regard to how the petitioner’s preliminary objection has so far not been dealt with by the Revenue, this appears to be a fit case to direct the DRP to decide the petitioner’s objection regarding chargeability of alleged shortfall in share premium as a preliminary issue and further to observe that in case the decision of the DRP on the preliminary issue is adverse to the petitioner, it would be open to the petitioner-assessee to challenge the decision of the DRP on the preliminary issue in a writ petition, in case the petitioner makes out a case at that stage that the decision of the DRP on the preliminary issue is patently illegal, notwithstanding the availability of alternate remedy before the ITAT.
19. One can compare it with the procedure of income escaping assessment where the assessee can object to the proceedings u/s 147 / 148 and the AO is under obligation to dispose off those objections
Position as of today-:
20. Now when an assessee receives a notice of its case being referred to TPO, it may file objection to such reference and the jurisdictional AO will have to dispose off the same on merits.
Instr 15/2015 by CBDT
21. First and foremost, it superseeds instruction 3/2003with immediate effect.
22. Refer para 3.2 of the instruction
23. The instruction runs into 8 pages and is structured as follows
|1,2||introduction and background|
|3||Reference to Transfer Pricing Officer (TPO) [requirements to be fullfilled by AO]|
|4||Deals with Role of Transfer Pricing Officer|
|5||Role of the AO after Determination of ALP|
|6||Maintenance of Data Base by income tax department|
3. Reference to Transfer Pricing Officer (TPO)
24. Para 3.1 reads that once a case is referred to TPO and TPO determines the ALP, the AO has to proceed taking the ALP
25. Para 3.2 can be divided into 2 parts.
26. First part requqires AO to consider primary details from the accountant’s report i.e. 3CEB
27. Second part mandates hearing in following cases
(a) where the taxpayer has not filed the Accountant’s report under section 92E of the Act but international transactions undertaken by it come to the notice of the AO;
(b) where the taxpayer has not declared one or more international 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
(c) where the taxpayer has declared the international transaction or 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 transaction or transactions are not international transactions or do not impact the income of the taxpayer.
28. I am re-producing the para 3.3 in a para phrased manner. Emphasis by Underlining and comments are mine
3.3 The exercise of finding out whether any income arises and/or is affected or potentially arises and/or is potentially affected by the determination of the ALP of the international transaction would certainly be a factor, in addition to other factors, in determining whether or not it is necessary or expedient to refer the matter to the TPO.
In case no objection is raised by the taxpayer to the applicability of Chapter X [sections 92 to 92F] of the Act, then the prima facie view of the AO would be sufficient before referring the international transaction to the TPO for determining the ALP.
29. Comment – No mention of giving an opportunity to the assessee for raising the objections and disposal of such objections at all. Refer para 52 as re-produced above of Vodafone judgement.
However, where the applicability of Chapter X [sections 92 to 92F] of the Act to the facts of the taxpayer’s case is objected to, the assessee’s objection should be considered and specifically dealt with so as to make sufficient compliance with the principles of natural justice.
30. These provisions should be made applicable mutalis mutandis before referring the case to TPO.
31. Para 3.4 requires the approval of the Principal Commissioner or Commissioner as provided in the Act which is an old requirement.
32. I am re-producing the para 3.5 in a para phrased manner. Emphasis by Underlining and comments are mine
3.5 Since transfer pricing cases are now being selected for scrutiny on the basis of risk parameters, there is no requirement of selecting a transfer pricing case for scrutiny on the basis of the value of the international transaction.
33. Comment – No criteria / approach or any details are made available.
Consequently, there would be no requirement of referring an international transaction to the TPO for determination of its ALP merely because the value of the international transaction is above a particular limit.
In particular, where a case has been selected for scrutiny only on non-TP issues and the case also involves international transactions with AEs, the case shall not be referred to the TPO irrespective of the value of the international transaction or aggregate value of all international transactions.
The only exception to this would be a case selected for scrutiny on non-TP parameters where the AO comes to know that the taxpayer has entered into international transaction or transactions but the taxpayer has either not filed the Accountant’s report under section 92E or has not disclosed the said international transaction or transactions in the Accountant’s report filed. In such exceptional situations, the AO may refer the matter to the TPO after providing an opportunity of being heard to the taxpayer.
34. Para 4 states that each TPO should not have more than 50 cases.
35. Para 6 deals with the data to be maintained by IT Dept.
Basis of conclusion -:
36. The list of Background material is hereinbelow.
A. ITAT Mumbai E Bench M/s. Tata Consultancy Services Limited dated 4-Nov-2015 ITA No.7513/M/2010 Assessment year : 2005-06 [ITAT – Mumbai]
B. “Vodafone India Services P. Ltd. vs. Union of India”, 361 ITR 531 (Bom.), [vodafone]
C. “Aztec Software and Technology Services Ltd. vs. ACIT”, 294 ITR (AT) 32 (Bangalore) [SB] dated 12-July 2007 – [ITAT-SB]
CBDT instructions / circulars etc as follows
D. Instruction no 15/2015 dated 16 October 2015
E. CBDT Instruction No.3, dated 20.05.2003
( Author CA. Yogesh S. Limaye can be reached at firstname.lastname@example.org)