Transfer pricing regime to cover all Rs 5 cr-plus deals
All cross-border transactions worth Rs 5 crore or more will come under the scrutiny of the transfer pricing regime, even if there is no prima facie reason to suspect tax evasion /avoidance.
This ruling by a specially formed five-member bench of the Income-Tax Appellate Tribunal (ITAT) is critical to India’s fledgling transfer pricing regime. Any other decision would have rendered all transfer pricing orders given out until now completely invalid.
Normally, all cross-border transactions of Rs 5 crore or more were referred to the transfer pricing officer (TP). The issue of prima facie evidence as a prerequisite for referring the case to a TP officer arose when a Bangalore-based software company Aztec Software & Technology challenged the practice of referring such transactions mandatorily to the TP officer. The company insisted the assessing officer had no reason to refer the matter to TP officer as the assessing officer could not provide any evidence of a possible tax evasion by Aztec.
The Commissioner (Appeal) upheld this and gave reasons to support his stand including the intention of the legislature. According to the commissioner an element of “tax avoidance” is a prerequisite for bringing the cross-border taxation under the scrutiny of the transfer pricing regime.
But ITAT has now ruled that the threshold limit of Rs 5 crore fixed by the Central Board of Direct Taxes (CBDT) should hold for referring all cases to the TP officer. In its order the ITAT also held that TP assessments can be made even in cases of tax exempt units.
It also said the industry average is not sufficient to arrive at the arm’s length price. The arm’s length price should be arrived at in more convincing ways. The ITAT also underscored that the TP officer must record all the facts and reasons of his decision in the TP order.
This is for the benefit of the adjudicating authorities. The path-breaking order that paved way for the continuation of the existing mode of transfer pricing assessment was made by the bench comprising Pramod Kumar, KC Singhal, Vimal Gandhi (president ITAT) NL Kalra and Sudhakar Reddy. TP Ostwal, member of the Transfer Pricing Committee that drafted India’s TP Rules, said: “The order stands for continuity.”
The tax authorities embarked upon the rare exercise of setting up a five-member Special Bench of ITAT after the Commissioner (Appeal), made a decision, which not only questioned the prevailing practise, but also the spirit of the CBDT circular, which instructed officers to refer all cross-border transactions above Rs 5 crore to the TP officer.