Sections 92 & 92A to 92F l Transfer pricing

720. Clarification on provisions governing transfer price in an international transaction

The Finance Act, 2001, has substituted the existing section 92 of the Income-tax Act by new sections 92 and 92A to 92F. These new provisions lay down that income arising from an international transaction between associated enterprises shall be computed having regard to the armís length price. The term ďassociated enterpriseĒ has been defined in section 92A. Section 92B defines an ďinternational transactionĒ between two or more associated enterprises. The provisions contained in section 92C provide for methods to determine the armís length price in relation to an international transaction, and the most appropriate method to be followed out of the specified methods. While the primary responsibility of determining and applying an armís length price is on the assessee, sub-section (3) of section 92C empowers the Assessing Officer to determine the armís length price and compute the total income of the assessee accordingly, subject to the conditions provided therein. Section 92D provides for certain information and documents required to be maintained by persons entering into international transactions, and section 92E provides for a report of an accountant to be furnished along with the return of income.

The Board have prescribed rules 10A to 10E in the Income-tax Rules, 1962, giving the manner and the circumstances in which different methods would be applied in determining armís length price and the factors governing the selection of the most appropriate method. The form of the report of the accountant and the documents and information required to be maintained by the assessees have also been prescribed.

The aforesaid provisions have been enacted with a view to provide a statutory framework which can lead to computation of reasonable, fair and equitable profit and tax in India so that the profits chargeable to tax in India do not get diverted elsewhere by altering the prices charged and paid in intra-group transactions leading to erosion of our tax revenues.

However, this is a new legislation. In the initial years of its implementation, there may be room for different interpretations leading to uncertainties with regard to determination of armís length price of an international transaction. While it would be necessary to protect our tax base, there is a need to ensure that the taxpayers are not put to avoidable hardship in the implementation of these regulations.

In this background the Board have decided the following :

(i)The Assessing Officer shall not make any adjustment to the armís length price determined by the taxpayer, if such price is up to 5 per cent less or up to 5 per cent more than the price determined by the Assessing Officer. In such cases the price declared by the taxpayer may be accepted.

(ii)The provisions of sections 92 and 92A to 92F come into force with effect from 1st April, 2002, and are accordingly applicable to the assessment year 2002-03 and subsequent years. The law requires the associated enterprises to maintain such documents and information relating to international transactions as may be prescribed. However, the necessary rules could be framed by the Board only after the Finance Bill received the assent of the President and have just been notified. Therefore, where an assessee has failed to maintain the prescribed information or documents in respect of transactions entered into during the period 1-4-2001 to 31-8-2001 the provisions of section 92C(3) should not be invoked for such failure. Penalty proceedings under section 271AA or 271G should also not be initiated for such default.

(iii)It should be made clear to the concerned Assessing Officer that where an international transaction has been put to a scrutiny, the Assessing Officer can have recourse to sub-section (3) of section 92C only under the circumstances enumerated in clauses (a) to (d) of that sub-section and in the event of material information or documents in his possession on the basis of which an opinion can be formed that any such circumstances exists. In all other cases, the value of the international transaction should be accepted without further scrutiny.

Circular : No. 12/2001, dated 23-8-2001.

720A. Transfer Pricing Officer - Notified subordinate officer

In exercise of the powers conferred by section 118 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby directs that :ó

(a)the Transfer Pricing Officer referred to in the Explanation to section 92CA of the said Act, as specified in column (4), of the Table below shall be subordinate to the Director of Income-tax specified in column (3) of the Table;

(b)the Director of Income-tax, as specified in column (3), shall be subordinate to the Director General of Income-tax specified in column (2) of the aforesaid Table.

Table

S. No.

Chief Commissioner/Director General of Income-tax

Commissioner/Director of Income-tax

Transfer Pricing Officer

(1)

(2)

(3)

(4)

1.

Director General of Income-tax (International Taxation)

Director of Income-tax (Transfer Pricing), Delhi.

(i) Joint Commissioner of Income-tax (Transfer Pricing Officer-I), Delhi.

(ii) Joint Commissioner of Income-tax (Transfer Pricing Officer-II), Delhi.

2.

 

Director of Income-tax (Transfer Pricing), Mumbai.

(i) Joint Commissioner of Income-tax (Transfer Pricing Officer-I), Mumbai.

(ii) Joint Commissioner of Income-tax (Transfer Pricing Officer-II), Mumbai.

3.

 

Director of Income-tax (Transfer Pricing), Bangalore.

(i) Joint Commissioner of Income- tax (Transfer Pricing Officer-I), Bangalore.

(ii) Joint Commissioner of Income-tax (Transfer Pricing Officer-II), Bangalore.

4.

 

Director of Income-tax (Transfer Pricing), Kolkata

(i) Joint Commissioner of Income-tax (Transfer Pricing Officer-I), Kolkata.

(ii) Joint Commissioner of Income-tax (Transfer Pricing Officer-II), Kolkata.

5.

 

Director of Income-tax (Transfer Pricing), Chennai

(i) Joint Commissioner of Income-tax (Transfer Pricing Officer-I), Chennai.

(ii) Joint Commissioner of Income-tax (Transfer Pricing Officer-II), Chennai.

 

This Notification shall come into force with effect from the date of publication in the Official Gazette.

Notification : No. 50/2003 [F.No. 500/18/2002-FTD], dated 12-3-2003.

 

720B. Computation of income from international transaction having regard to armís length price

The provisions relating to transfer prior contained in sections 92 to 92F of the Income-tax Act, have come into force with effect from assessment year 2002-03. In terms of the provisions, income from an international transaction is to be computed having regard to armís 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 armís 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 armís 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 armís 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 armís 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 armís length price, determined by the TPO. Thus, whereas the determination of the armís 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 armís 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 accountantís 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 accountantís 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 scrutinizing 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 2002-03 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 armís 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 armís 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 emphasized 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 armís 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 ďarmís length price.Ē : Under sub-section (4) of section 92C, the Assessing Officer has to compute total income of the assessee having regards to the armís 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 armís 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 armís 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 ďarmís length priceĒ in identical or substantially identical cases.

These instructions are under section 119 of the Income-tax Act.

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 sec-

tion 92B and

assessment

year

Name and

address of

the associ-

acted enter-

prise and

the country

in which it

is

resident

Nature of

asscia-

tion as

per sec-

tion 92A

Date of

issue of

notice to

taxpayer

Transfer

price as

taken by

the tax-

payer

Armsí length

price as deter-

mined by the

Transfer Price-

ing 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.

Designation of the

Head

Territorial

Persons or class of

No.

Income-tax Authorities

Quarter

Area

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, Uttaranchal, Himachal 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)

Delhi

Areas lying within the territorial limits of States of Delhi, Rajasthan, Punjab, Haryana, Jammu and Kashmir, Uttar Pradesh, Uttaranchal, Himachal 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.

2.

(i)

Joint Commissioner of Income-tax (Transfer of Pricing Officer-I)

Mumbai

Area lying within the territorial limits of States of Maharash≠tra, Gujarat, and Madhya Pradesh, Daman and Diu

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 theiroffice in the territorial area indicated in column 4.

 

(ii)

Joint Commissioner of Income-tax (Transfer Pricing Officer-II)

Mumbai

Areas lying within the territorial limits of States of Maharash≠tra, Gujarat, and Madhya Pradesh, Daman and Diu

Persons or class of persons whose names begin with alphabet M to Z and area assessed or assessable within the jurisdiction of Assessing Officer having their office in the territorial area indicated 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-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 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, Lakshadweep, Andaman and Nicobar 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, Lakshadweep, Andaman and Nicobar 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 area 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.

 

Instruction : No. 3 of 2003, dated 20-5-2003.

 

720C. Reference to Transfer Pricing Officer in cases where assessees had entered into an international transaction

Instruction No. 2/2003 was issued for picking up of cases for scrutiny and for reference to Transfer Pricing Officers in cases where the assessees had entered into an international transaction whose commutative value exceeds Rs. 5 crore. However, doubts have been expressed as to whether instructions could be carried out in view of the general restriction on picking of the cases for scrutiny as this work is expected to be carried out through computer software.

It is hereby clarified that the picking up of the cases for scrutiny for the purposes of reference to T.P.O. was approved by the CBDT with a specific purpose of ensuring that the transfer pricing regulations are implemented timely and uniformly. The instruction has to be carried out manually till such time a computer software for the same is made available to the officer. Computer Software when developed will include these international transactions also as one of the criteria for picking up the cases for scrutiny.

Source : Instruction No. 8/2003, dated 11-8-2003.