Transfer Pricing in India

Reference to Transfer Pricing Officer and Assessment Proceedings

All transactions between related parties in India must comply with Transfer Pricing laws, according to the Income Tax legislation in India. Transfer pricing is a concept that has been applied to ensure that all commercial transactions between various entities of a multinational company are conducted at an arm’s length price. If the Assessing Officer has any issues about the appraisal of transfer pricing, he or she may refer the transaction to a Transfer Pricing Officer. In this post, we will go over the actions that an Assessing Officer must take to refer assessments, as well as the duty of a Transfer Pricing Officer.

Reference made to Transfer Pricing Officer

A Transfer Pricing Officer may be referred to by an Assessing Officer for the calculation of arm’s length price in an international transaction. The officer can decide the arm’s length price for the transaction by issuing a written order after reviewing the available facts and documentation. The arms’ length price should be roughly equal to the open market value of the item or product which is the core of the concerned business transaction.

The essential requirement for issuing a reference is that an Assessing Officer should be satisfied that the taxpayer has been engaged in an international transaction with an associated firm. Form 3CEB includes all of the relevant factual information for foreign transactions. The key information of such a transaction would generally be available in the accountant’s report. These data would aid the Assessing Officer in reaching a decision on whether or not a reference is required.

Earlier, the Central Board of Direct Taxes (i.e., CBDT) had issued a direction stating that whenever the aggregate value of an international transaction surpasses Rs. 5 crores, the matter must be reviewed and reference must be addressed to the officer chosen on this behalf by the CBDT. But prior to making a reference, the Assessing Officer must obtain the permission of the Principal Commissioner/Commissioner/Principal Director or Director. Moreover, the Department will examine the threshold limit of Rs. 5 crores on a regular basis based on the workload of the TPOs.

In nutshell, the Finance Ministry had earlier provided some administrative rules that outline the criteria for selecting international transactions for examination by Assessing Officers and the process of verification by Transfer Pricing Officers. For example, a ceiling level of Rs. 5 crores had been created for selecting international transactions for transfer pricing investigation. Only the cases where the aggregate value of many transactions with the same Associated Enterprise or multiple transactions with different Associated Enterprises exceeds Rs. 5 crores could be selected for inspection and sent to the Transfer Pricing Officer. Before referring to the Transfer Pricing Officer, the AO must be satisfied that the international transaction under discussion is with a related firm. The AO, on the other hand, will not have the authority to investigate the validity or otherwise of the price at which the transaction was entered into.

But later, the Central Board of Direct Taxes (or CBDT) has issued further instructions in Circular 3/2016 dated 10/03/2016 providing the detailed guidelines for the purpose of implementation of the transfer pricing provisions by the Assessing Officer and the Transfer Pricing Officer. The threshold limits were also enhanced. The AO must obtain prior consent from the jurisdictional Principal Commissioner of Income-tax (‘PCIT’) or CIT before referring to the TPO.

Now, if the case is flagged during the scrutiny stage due to a Transfer Pricing Risk parameter, the AO is mandatorily required to refer the case to the TPO irrespective of any threshold limit. The cases selected for inspection on non-transfer pricing characteristics may also be submitted to the Transfer Pricing Officer if the AO detects the presence of any international transactions or if a transfer pricing adjustment in excess of Rs. 10 crores were made in a previous assessment year.

The department recognizes that aggregation of many transactions may be done by a taxpayer for the purpose of benchmarking a particular transaction, and in this context, numerous transactions may be referred to the TPO if the scrutiny or inspection is prompted on account of Transfer Pricing risk parameters in relation to a particular international transaction.

Duties of Transfer Pricing Officer

The job of Transfer Pricing Officer begins upon receipt of a reference from an Assessing Officer. This job is limited to determining the arm’s length pricing in connection to each specific international transaction reported to him by the Assessing Officer. If the officer uncovers the presence of a few transactions that have not been referred to him by the Assessing Officer, the officer must address the situation with the Assessing Officer so that a new reference is obtained with regard to such discovered transactions.

The Transfer Pricing Officer is obligated to consider all relevant facts and data while calculating the arm’s length price, as well as is required to adopt the most appropriate technique for the computation of the same as specified by law. The TPO is then obliged to issue a thorough order outlining the method of calculation, data specifications, and justifications for arriving at the said arm’s length price. It is required to provide the assessee with a formal opportunity to be heard before making any modifications to the total income declared by the assessee in his tax return.

If a mistake is discovered that is obvious from the record, the Transfer Pricing Officer may also revise any decision granted by him in accordance with the provisions of Section 92CA (5), and the provisions of Section 154 pertaining to rectification of mistake will be applicable accordingly. If the Transfer Pricing Officer makes a change, he must transmit a copy of his revised order to the Assessing Officer, who must then amend the order of assessment in accordance with the Transfer Pricing Officer’s order.

What are the obligations of taxpayers?

Under income tax laws, an Income Tax Officer^[1] (or ITO) has the authority to scrutinize the books, papers, documents, and income tax returns of any employer, tax-payer, or any other person who is subject to, or who the ITO considers to be subject to, the provisions of the Income Tax Act dealing with verification of the accuracy of any return made or if no return was submitted, ascertaining the tax due under the Act. During the said examination, the assessee should give the ITO his or her entire cooperation.

The Income Tax Officer may require a taxpayer to attend a hearing or examination and provide any books, papers, documents, or income tax returns in his or her custody or control for any legitimate purpose. A person/member of the Bar Council of India or a chartered accountant in practice may aid or represent the person.

The records and other papers of any assessee, employer, or any other person who is subject to, and who an ITO considers is subject to, the provisions of the Act must be open to inspection by the Income Tax Officer during business hours and must be kept for eight years after the end of the assessment year to which the records or documents pertain.

In addition, the Income Tax Officer may conduct an oath examination of anyone who appears to have knowledge of any income that has been or would have been subject to taxation, or any transaction that has the potential to affect such income. During the examination, the assessee should provide the ITO his or her entire support & cooperation.

Before determining the income and finalizing the assessment, the Assessing Officer shall provide the assessee an opportunity to be heard. To make sure that all references are dealt with in a timely and effective manner, a record of all such developments should be kept in the approved format. Such a form will serve as a valuable database for future reference.

Takeaway

The legislative provisions in this regard are contained in Section 92CA of the Income Tax Act. According to the section, if any person, taxpayer, or the assessee has in any previous year entered into a foreign transaction or a specified domestic transaction, and when the Assessing Officer believes that is very important to make a reference to TPO, he may do so considering the facts of the case. Such a reference requires the prior permission of the Principal Commissioner or Commissioner. The AO can refer the case to a Transfer Pricing Officer for the purpose of calculation of the arm’s length price with regard to the said international transaction or specified domestic transaction.

Read our Article:An overview of Specified Domestic Transaction in TP Provisions