Widening of the scope of power of Transfer Pricing Officer in context of Section 92CA of the Income Tax Act, 1961 - An Analogous study

In the last few years the Government of India has taken many steps in order to strengthen the Transfer Pricing (Taxation) regime in India. A series of amendment has been introduced in order to enhance the ambit of tax base and consequent increase in the revenue. The latest step in this direction was the extension of the transfer pricing provisions to Specified Domestic Transaction w.e.f. 1.4.2012. Another area in which the government achieved considerable success was widening of the scope of the powers of Transfer Pricing Officer. The basic intention of this article is to highlight the latest development that has resulted in strengthening of the powers of the Transfer Pricing Officers along with a summary discussion on section 92 CA of the Income Tax Act, 1961.

Section 92CA of the Income Tax Act, 1961 (Reference to the Transfer pricing officer) deals with role TPO (Transfer Pricing Officer) under the transfer pricing regime. According to section 92 CA, the assessing officer (AO) may refer the computation of the Arm’s Length Price (ALP) under section 92C to the TPO if he considers it necessary and expedient and an approval of the commissioner has been obtained.

Section 92 CA also casts an obligation on the TPO to provide an opportunity of being heard to the assessee. TPO shall serve a notice to the assessee requiring him to produce ( or cause to be produced) on a specified date, any evidence on which the assessee may rely in support of the calculation made by him of the ALP in relation to the international transaction. A distinction has to be drawn while interpreting this section with reference to section 92C (3), wherein the AO is obliged to disclose the method adopted by him to compute ALP in the show cause notice issued to the assessee but where the AO is referring the computation of ALP to TPO, he is not required to disclose the reason for such referring to the assessee. After conducting the hearing and taking into consideration all the relevant facts, the TPO shall by order in writing determine the ALP in relation to the transaction in accordance with the provision of section 92C (3) and send a copy of his order to the AO and the assessee. On receipt of the order, the AO shall proceed to compute the total income of the assessee under section 92C (3) having regard to the ALP determined by the TPO. It should be noted that it is incumbent upon the AO to proceed to compute the total income of the assessee in conformity with the ALP determined by the TPO (The position taken by the Hon’ble Supreme Court in case of Juggilal Kamplapat Bankers vs WTO has been nullified w.e.f. June 1, 2007).

Before going into the core part of the article it is essential to discuss another important aspect of section 92CA – “Whether it is legal requirement under provisions contained in chapter X (i.e. Transfer Pricing) that AO should prima facie demonstrate that there is avoidance, before invoking the relevant provision (i.e. section 92 CA)”. This issue was settled in the case of Aztec Software & Technology Services Ltd vs CIT (2007) wherein it was held by the tribunal that avoidance of tax cannot be considered as a condition precedent for invoking the provisions of section 92C/92CA. There is no requirement of establishment of ‘tax evasion’ before initiation of proceedings for determination of ALP. The tribunal further substantiated that “perusal of the provisions of sections 92C and 92CA reveals that these provisions can be invoked by the Assessing Officer and he can proceed to determine ALP where he either finds the existence of the circumstances mentioned in clauses (a) to (d) of section 92C (3) or where he considers it necessary and expedient to refer the determination of ALP to the TPO. There is no other requirement for invoking these provisions by the Assessing Officer. Besides, as per the mandate of section 92(1), income from international transaction between associated enterprises has to be computed having regard to ALP. Therefore, the question of tax avoidance is not to be established by following mandatory provisions. Therefore, the language used by the Legislature is plain and unambiguous and there is nothing in the language employed by the Legislature on the basis of which it can be said that the Assessing Officer must demonstrate the avoidance of tax before invoking these provisions”.

Now let us focus on the core part of the article that deals with latest development that has taken place resulting in enhancement of the powers of TPO. This analysis can be best done by comparing the legal scenario prevailing in two phases namely Pre – Finance Act 2011 and Post – Finance Act 2011.

Prior to the enactment of the Finance Act 2011, the TPO cannot under section 92CA (3) determine an ALP in relation to the international transaction not referred to it by Assessing Officer under section 92CA (1). This position was enumerated in the case of 3i Infotech Ltd vs CIT [IT appeal no 2831of 2007, July 30, 2010]. In this case assessee was a software company that entered into international transactions with its associate enterprises. In course of assessment, Assessing Officer referred matter to TPO for determining ALP. TPO was of view that no adjustment was required to be made to value of international transactions entered into by assessee. He, however, proceeded to make an adjustment in respect of an issue which was not reported by assessee as an international transaction in Form No. 3CEB filed pursuant to section 92E. Said issue related to transfer of three employees of assessee to its associate enterprise, namely, Infotech USA. According to TPO, transfer of such employees, resulted into benefit to transferee entity, as it was not to incur any expense on recruitment and training and, salary packages to such employees were also less in comparison to foreign employees, resulting into savings to transferee-company. In such a situation, TPO computed arm’s length compensation to associate enterprise at Rs. 2.71 lakhs - Following above report of TPO, Assessing Officer made an addition of Rs. 2.71 lakhs to assessee’s income. Now the issue before the tribunal was whether such additions made by the AO on basis of order issued by TPO was valid in law. The tribunal ruled the decision in the favor of the assessee and considered such additions as invalid. The tribunal further opined that the jurisdiction of a TPO is restricted to the transactions referred to him by the Assessing Officer under section 92 CA(1). The TPO, therefore, could not under section 92 CA(3) determine the ALP in relation to an international transaction not referred to him by the Assessing Officer under section 92CA(1). In this regard, Instruction No. 3 of 2003, dated 20-5-2003, issued by the CBDT regarding computation of income from international transaction having regard to arm’s length price, is very clear. In the said instructions, the CBDT explaining the role of the TPO has instructed that in terms of section 92CA of the Act, the TPO’s role is limited to the determination of arm’s length price in relation to the international transactions referred to him by the Assessing Officer and if during the course of proceedings before him, it is found that there are certain other transactions which have not been referred to him by the Assessing Officer, he will have to take up the matter with the Assessing Officer so that a fresh reference is received with regard to such transaction. The Board has further opined that reference to the TPO is transaction and not enterprise specific. A similar ruling was given in the case of Amadeus India Pvt Ltd vs CIT (2011) by the Delhi Tribunal.

To nullify the effect of the aforesaid rulings, sub-section (2A) was inserted in section 92CA w.e.f June 1, 2011 so as to specifically provide that the jurisdiction of the Transfer Pricing Officer shall extend to the determination of the ALP in respect of other international transactions, which are noticed by him subsequently, in the course of proceedings before him. These international transactions would be in addition to the international transactions referred to the TPO by the Assessing Officer.

Further, in order to enable the TPO to conduct on-the-spot enquiry and verification, section 92CA(7) is amended so as to enable the TPO to also exercise the power of survey conferred upon an income-tax authority under section 133A of the Act, w.e.f. June 1, 2011. 

Under section 92E of the Act, there is reporting requirement on the taxpayer and the taxpayer is under obligation to file an audit report in prescribed form (Form No.3 CEB) before the Assessing Officer (AO) containing details of all international transactions undertaken by the taxpayer during the year. This audit report is the primary document with the Assessing Officer, which contains the details of international transactions undertaken by the taxpayer. If the assessee does not report such a transaction in the report furnished under section 92E then the Assessing Officer would normally not be aware of such an International Transaction so as to make a reference to the Transfer Pricing Officer. The Transfer Pricing Officer may notice such a transaction subsequently during the course of proceeding before him. In absence of specific power, the determination of Arm’s Length Price by the Transfer Pricing Officer would be open to challenge even though the basis of such an action is non-reporting of transaction by the taxpayer at first instance. Section 92CA of the Act retrospectively amended (w.e.f. June 1, 2002) by Finance Act 2012 to empower Transfer Pricing Officer (TPO) to determine Arm’s Length Price of an international transaction noticed by him in the course of proceedings before him, even if the said transaction was not referred to him by the Assessing Officer, provided that such international transaction was not reported by the taxpayer as per the requirement cast upon him under section 92E of the Act. It is also provided in new sub-section (2C) that the AO shall not have power to reopen or rectify any assessment proceedings which have been completed before 1-7-2012.

Therefore from the above discussion it is clear that Finance Act 2011 & 2012 have played a pivotal role in conferring additional powers to the TPO. With the advent of transfer pricing in case of specified domestic transactions, it can be expected that further revisions in the legislature will be made in order to equip the transfer pricing officers to navigate through the new challenges.