In this context, the controversies surrounding recent judgments, notably, one delivered by the appellate commissioner, Bangalore (CIT-A), and other by the Delhi High Court (288 ITR 52), have led to the constitution of a special bench (at the tribunal level) to adjudicate on several technical issues pertaining to TP regulations.
As per the TP regulations, the assessing officer (AO) is empowered to refer a case to a specialised TP officer (TPO). A reference to the TPO can be made only where it is "necessary or expedient" to do so. In this context, the first question dealt by the CIT-A and the high court was whether a mere internal direction issued by the revenue department requiring AOs to refer all cases involving aggregate value of international transactions not less than Rs 5 crore to the TPOs could be regarded as a valid reference.
The CIT-A has answered the above question in the negative. Applying the above inference to the specific context of an Indian entity claiming tax holiday benefits, the CIT-A in his order has pointed out that such an entity may not have any motive to shift profits outside India, and thereby, erode the Indian tax base.
The Delhi High Court, however, has adopted a divergent view by stating that, what is "necessary or expedient" will depend on circumstances of each case, and the satisfaction of the AO in this regard, will have to be based on some objective criteria. No detailed enquiries are required to be made, and the AO is not required to scrutinise the correctness of the ALP computed by the assessee before making a reference to the TPO.
The second question addressed by the CIT-A and the high court is whether the order issued by the TPO is binding on the AO. Both the authorities have answered this question in the negative, by stating that, by use of words "having regard to", the provision clearly stipulates that for computing the income of the assessee, though the arm's length price (ALP) determined by the TPO must be taken into account, the AO should not only consider such ALP, but also all other issues/ matters relevant to the determination of income of the assessee. In other words, the order of the TPO cannot be considered to be binding or totally conclusive for the purpose of computing total income of the assessee.
In this context, it is worthwhile to note that, wherever legislature wanted to provide for a binding nature of order, it has adequately provided/ stated the same, as evident from language employed in sections 92CA(6) of the Act, and section 14A of the Wealth Tax Act, 1957 (WTA), which contains the phrase "in conformity with".
In a way, the high court has inter-linked its answer to both the questions, by stating that, the power/ right of the AO to finally determine the ALP, subsequent to receiving the report of the TPO, and "having regard to" the report of the TPO (which view has not been disputed by the revenue), pre-supposes that, what is required of the AO, before making a reference to the TPO, is a mere satisfaction that the reference is "necessary and expedient". In other words, what is ideally expected of the AO subsequent to receipt of the TPO's order, cannot be expected from the AO prior to making a reference.
In light of above controversies, ideally the budget proposals should contain remedial measures. Certain amendments in the transfer pricing legislation are definitely called for. Further, introduction of an advance pricing mechanism will also help reduce litigation in the transfer pricing arena.
India must move towards introduction of an advance pricing mechanism at the earliest.
The authors are senior tax professionals with Ernst & Young