MNCs & BPOs Transfer Pricing Issues settled

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MNCs & BPOs Transfer Pricing Issues settled

AIT News Network

MUMBAI. After Supreme Court’s ruling in case of Morgan Stanley AIT-2007- 246-SC modifying the ruling of the Authority for Advance Ruling; the heat has turned on MNC’s and BPOs Transfer Pricing and Arm’s Length Price methodology with Special Bench of ITAT passing landmark Ruling AIT-2007-250-ITAT on significant issues related to legal implications and requirement for invoking Transfer Pricing Provisions under the Income Tax Act. The Questions referred to the Special Bench and the issues settled are as under:

Question. Whether it is a legal requirement under the provisions contained in Chapter X of the Income tax Act, 1961 that the AO should prima facie demonstrate that there is tax avoidance before invoking the relevant provisions?

· Answer . Although Chapter-X has title "Special provision relating to avoidance of tax" and aim of various sections under Chapter-X is to check avoidance of taxes, diversion of income and funds by non residents from India, it is not necessary that AO must demonstrate such avoidance and diversion of tax before invoking provisions of section 92C and 92CA.

· Question . Whether it is a legal requirement under the provisions contained in Chapter X of the Income-tax Act, 1961 that the AO should prima facie demonstrate that any one or more of the circumstances set out in clauses (a), (b), (c ) and/or (d) of sub-section (3) of section 92C of the said Act are satisfied in the case of any assessee, before his case is referred to the Transfer Pricing Officer under sub-section (1) of Section 92CA for computation of the arm's length price?

· Answer : It would be sufficient for invoking provisions of section 92CA(1) if it is shown that there existed circumstances which prompted the AO to consider it necessary or expedient to refer the computation of ALP to the TPO.

Question . Whether the AO is required to record his opinion/reason before seeking the previous approval of the Commissioner u/s 92CA(1) of the Income-tax Act, 1961.?

Answer . No

· Question . Whether before making a reference to the Transfer Pricing Officer u/s 92CA(1) read with Section 92C(3) of the Income tax Act, 1961, is it is a condition precedent that the AO shall provide to the assessee an opportunity of being heard?

· Answer . No

· Question . What is the legal effect of Instruction No.3 of 2003 dated 20 th May, 2003 issued by the CBDT on Transfer Pricing matters?"

· Answer . There is no illegality in the directions issued by CBDT.

· Question . What is the role of the AO after receipt by him of the order passed by the Transfer Pricing Officer u/s 92CA(3) of the Income-tax Act, 1961? whether order of the Transfer Pricing Officer issued under sub-section (3) of section 92CA is binding on the AO, in the sense that he has to make assessment taking arms' length price determined by the TPO without making any change u/s 92CA(3).

Answer . TPO’s order under sub-section (3) of section 92C cannot be treated as final and binding on the AO. There may be cases in which the assessee after arms’ length price is determined by the TPO and before his order is made the basis of assessment, may get such authentic material to show that transfer pricing determined by the TPO is not correct or should not be blindly adopted without modifying it.

(Click here for Full Text of Judgment)

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