Computation of income from international transaction having regard to arm's length price—Section 92 of the Income-tax Act—Reference to Transfer Pricing Officer and his role—Regarding - Income Tax - Instruction No 03/2003

Computation of income from international transaction having regard to arm's length price—Section 92 of the Income-tax Act—Reference to Transfer Pricing Officer and his role—Regarding Instruction No 3 Dated 20/5/2003 To, All Chief Commissioners of Income-tax. All Director Generals of Income-tax. Subject : Computation of income from international transaction having regard to arm's length price—Section 92 of the Income-tax Act—Reference to Transfer Pricing Officer and his role—Regarding. The provisions relating to transfer price contained in sections 92 to 92F of the Income-tax Act have come into force with effect from assessment year 2002-2003. In terms of the provisions, income from an international transaction is to be computed having regard to arm's length price between the associated enterprises. Further, in terms of section 92CA, a Transfer Pricing Officer, on a reference received from the Assessing Officer, is required to determine arm's length price of an international transaction by an order and the Assessing Officer is required to compute the income having regard to the price so determined by the TPO. The notification regarding jurisdiction of TPOs and their controlling officers have been issued by the Central Board of Direct Taxes and the copies thereof are enclosed for ready reference as annexure II. In order to maintain uniformity of procedure and to ensure that work in this important area proceeds smoothly and effectively, the following guidelines are hereby issued : (i) Reference to Transfer Pricing Officer (TPO) : The power to determine arm's length price in an international transaction is contained in sub-section (3) of section 92C. However, section 92CA provides that where the Assessing Officer considers it necessary or expedient so to do, he may refer the computation of arm's length price in relation to an international transaction to the TPO. Sub-section (3) of section 92CA provides that the TPO after taking into account the material available with him shall, by an order in writing, determine the arm's length price in accordance with sub-section (3) of section 92C. Sub-section (4) of section 92CA provides that on receipt of the order of the TPO, the Assessing Officer shall proceed to compute the total income of the assessee having regard to the arm's length price determined by the TPO. Thus, whereas the determination of the arm's length price, wherever reference is made to him, is required to be done by the TPO under sub-section (3) of section 92CA read with sub-section (3) of section 92C, the computation of total income having regard to the arm's length price so determined by the TPO is required to be done by the Assessing Officer under sub-section (4) of section 92C read with sub-section (4) of section 92CA. In order to make a reference to the TPO, the Assessing Officer has to satisfy himself that the taxpayer has entered into an international transaction with an associated enterprise. One of the sources from which the factual information regarding international transaction can be gathered is Form No. 2CEB filed with the return which is in the nature of an accountant's report containing basic details of an international transaction entered into by the taxpayer during the year and the associated enterprise with which such transaction is entered into, the nature of documents maintained and the method followed. Thus, the primary details regarding such international transactions would normally be available in the accountant's report. The Assessing Officer can arrive at a prima facie belief on the basis of these details whether a reference is considered necessary. No detailed enquiries are needed at this stage and the Assessing Officer should not embark upon scrutinising the correctness or otherwise of the price of the international transaction at this stage. In the initial years of implementation of these provisions and pending development of adequate data base, it would be appropriate if a small number of cases are selected for scrutiny of transfer price and these are dealt with effectively. The Central Board of Direct Taxes, therefore, have decided that wherever the aggregate value of international transaction exceeds Rs. 5 crores, the case should be pricked up for scrutiny and reference under section 92CA be made to the TPO. If there are more than one transaction with an associated enterprise or there are transactions with more than one associated enterprises the aggregate value of which exceeds Rs. 5 crores, the transactions should be referred to the TPO. Before making reference to the TPO, the Assessing Officer has to seek approval of the Commissioner/Director as contemplated under the Act. Under the provisions of section 92CA reference is in relation to the international transaction. Hence all transactions have to be explicitly mentioned in the letter of reference. Since the case will be selected for scrutiny before making reference to the TPO, the Assessing Officer may proceed to examine other aspects of the case during pendency of assessment proceedings but await the report of the TPO on the value of international transaction before making final assessment. The threshold limit of Rs. 5 crores will be reviewed depending upon the workload of the TPOs. The work relating to selection of cases for scrutiny and reference to TPO on the above basis in respect of pending returns filed for the assessment year 2002-2003 should be completed by June 30, 2003. (ii) Role of Transfer Pricing Officer : The role of the TPO begins after a reference is received from the Assessing Officer. In terms of section 92CA this role is limited to the determination of arm's length price in relation to the international transaction(s) referred to him by the Assessing Officer. 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 transactions. It may be noted that the reference to the TPO is transaction and enterprise specific. The transfer price has to be determined by the TPO in terms of section 92C. The price has to be determined by any one of the methods stipulated in sub-section (1) of section 92C and by applying the most appropriate method referred to in section (2) thereof. There may be occasions where application of the most appropriate method provides results which are different but equally reliable. In all such cases, further scrutiny may be necessary to evaluate the appropriateness of the method, the correctness of the data, weight given to various factors and so on. The selection of the most appropriate method will depend upon the facts of the case and the factors mentioned in rules contained in rule 10C. The TPO after taking into account all relevant facts and data available to him shall determine arm's length price and pass a speaking order after obtaining the approval of the DIT(TP). The order should contain details of the data used, reasons for arriving at a certain price and the applicability of methods. It may be emphasised that the application of method including the application of the most appropriate method, the data used, factors governing the applicability of respective methods, computation of price under a given method will all be subjected to judicial scrutiny. It is, therefore, necessary that the order of the TPO contains adequate reasons on all these counts. Copies of the documents or the relevant data used in arriving at the arm's length price should be made available to the Assessing Officer for his records and use at subsequent stages of appellate or penal proceedings. (iii) Role of the Assessing Officer after receipt of "arm's length price" : Under sub-section (4) of section 92C, the Assessing Officer has to compute total income of the assessee having regards to the arm's length price so determined by the TPO. While sub-section (4) of section 92CA clearly provides that such computation of income will be made having regard to the arm's length price so determined by the TPO, it is imperative that a formal opportunity is given to the taxpayer before making adjustments to the total income. The opportunity with regard to the determination of arm's length price has already been given by the TPO and, therefore, opportunity by the Assessing Officer, for final determination of income under sub-section (4) of section 92C read with sub-section (4) of section 92CA is to be given by the Assessing Officer. (iv) Maintenance of data base : It is to be ensured by the DIT (Transfer Pricing) that the reference received from the Assessing Officer is dealt with expeditiously so as to leave the Assessing Officer with sufficient time to offer an opportunity of being heard to the taxpayer before computing the income and completing the assessment. In order to ensure that all the references are attended to timely and effectively, a record of all such developments should be maintained in the format enclosed as annexure I to these guidelines. This format will also serve as an important data base for future action and also help ensure uniformity in the determination of "arm's length price" in identical or substantially identical cases. These instructions are under section 119 of the Income-tax Act. (Sd.) Davendra Shanker, Director (Foreign Tax Division). [F. No. 500/19/2003-FTD] Annexure I Register of record to be maintained by Transfer Pricing Officer : 1 2 3 4 5 6 7 8 9 10 11 12 13 S. No Date of receipt of reference from A. O. Name of the A. O. making reference Name and address of the tax-payer and nature of business Nature and quantum of international transaction as per section 92B and assessment year Name and address of the associ- ated enter prise and the country in which it is resident Nature of associa- tion as per sec- tion 92A Date of issue of notice to taxpayer Transfer price as taken by the tax- payer Arms' length price as deter mined by the Transfer Pricing Officer under section 92CA(3) Method applied Reference to any database adopted by T. P. O. Date of despatch of the order of the A. O. ANNEXURE II Order under section 120 read with section 92CA of the Income-tax Act, 1961, dated April, 2003. In exercise of the power conferred by sub-section (1) and sub-section (2) of section 120 of the Income-tax Act, 1961, the Central Board of Direct Taxes hereby directs that the Transfer Pricing Officers mentioned in column 2 having their headquarters mentioned in column 3 shall exercise such powers and perform such function of Transfer Pricing Officers as mentioned in section 92CA for the purpose of sections 92C and 92D of the Act, in respect of persons or classes of persons mentioned in column 5 : Schedule Sl. No. Designation of the Income-tax Authorities Head Quarter Territorial area Persons or class of persons (1) (2) (3) (4) (5) 1. (i) Joint Commissioner of Income-tax (Transfer Pricing Officer-I) Delhi Areas lying within the territorial limits of States of Delhi, Rajasthan, Punjab, Haryana, Jammu and Kashmir, Uttar Pradesh, Uttaran chal, Himachal Pra desh Persons or class of persons whose names begin with alphabet A to L and are assessed or asses- sable within the jurisdiction of Asses- sing Officer having their office in the territorial area indi cated in column 4. (ii) Joint Commissioner of Income-tax (Transfer Pricing Officer-II) Delhi Areas lying within the territorial lim its of States of Delhi, Rajasthan, Punjab, Haryana, Jammu and Kash mir, Uttar Pradesh, Uttaranchal, Himachal Pradesh Persons or class of persons whose names begin with alphabet M to Z and are assessed or asses- sable within the jurisdiction of Asses- sing Officer having their office in the territorial area indi cated in column 4. 2. (i) Joint Commissioner of Income-tax (Transfer of Pricing Officer-I) Mumbai Areas lying within the territorial limits of States of Mahar ashtra, Gujarat, and Madhya Pradesh, Daman and Diu Persons or class of persons whose names begin with alphabet A to L and are assessed or asses- sable within the jurisdiction of Asses- sing Officer having their office in the territorial area indi cated in column 4. (ii) Joint Commissioner of Income-tax (Transfer Pricing Officer-II) Mumbai Areas lying within the territorial limits of States of Mahar ashtra, Gujarat, and Madhya Pradesh, Daman and Diu Persons or class of persons whose names begin with alphabet M to Z and are assessed or asses- sable within the jurisdiction of Asses- sing Officer having their office in the territorial area indi cated in column 4. 3. (i) Joint Commissioner of Income-tax (Transfer Pricing Officer-I) Bangalore Areas lying within the territorial limits of States of Karnataka, Goa, Andhra Pradesh Persons or class of persons whose names begin with alphabet A to L and are assessed or assessable within the jurisdiction of Assessing Officer having their office in the territorial area indicated in column 4. (ii) Joint Commissioner of Income-tax (Transfer Pricing Officer-II) Bangalore Areas lying within the territorial limits of States of Karnataka, Goa, Andhra Pradesh Persons or class of persons whose names begin with alphabet M to Z and are assessed or assessable within the jurisdiction of Assessing Officer having their office in the territorial area indicated in column 4. 4. (i) Joint Commissioner of Income-tax (Transfer Pricing Officer-I) Chennai Areas lying within the territorial limits of States of Tamil Nadu and Kerala, Pondicherry, Lak shadweep, Andaman and Niccobar Islands Persons or class of persons whose names begin with alphabet A to L and are assessed or assessable within the jurisdiction of Assessing Officer having their office in the territorial area indicated in column 4. (ii) Joint Commissioner of Income-tax (Transfer Pricing Officer-II) Chennai Areas lying within the territorial limits of States of Tamil Nadu and Kerala, Pondicherry, Lak shadweep, Andaman and Niccobar Islands Persons or class of persons whose names begin with alphabet M to Z and are assessed or assessable within the jurisdiction of Assessing Officer having their office in the territorial area indicated in column 4. 5. (i) Joint Commissioner of Income-tax (Transfer Pricing Officer-I) Kolkata Areas lying within the territorial limits of States of Kolkata, North East Region, Orissa, Jharkhand, Bihar, Chhattisgarh. Persons or class of persons whose names begin with alphabet A to L and are assessed or assessable within the jurisdiction of Assessing Officer having their office in the territorial area indicated in column 4. (ii) Joint Commissioner of Income-tax (Transfer Pricing Officer-II) Kolkata Areas lying within the territorial limits of States of Kolkata, North East Region, Orissa, Jharkhand, Bihar, Chhattisgarh. Persons or class of persons whose names begin within alphabet M to Z and are assessed or assessable within the jurisdiction of Assessing Officer having their office in the territorial area indicated in column 4.