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TPO will continue to assess all cross-border deals above Rs 5 cr
November, 17th 2006

All cross-border transactions worth Rs 5 crore and above will continue to be assessed by a transfer pricing officer (TPO) of the income tax department, following a Delhi High Court order dismissing a petition by Sony India.

In its petition, broadcaster Sony had challenged the legal validity of an instruction issued in 03 by the Central Board of Direct Taxes (CBDT) to refer all cross-border transactions worth Rs 5 crore and above to the transfer pricing officer.

Such a classification is suspect and a violation of Article 14 of the constitution, Sony argued. Also, Section 92 C of the Income Tax Act, dealing with determination of arms length price, does not make such classification and hence is contrary to the I-T Act.

The HC observed that not all classification is barred by the statute of the constitution. Only when such classification is not based on an objective, intelligible criteria and not consistent with the objectives set out in the I-T Act, such classification invites constitutional invalidation, the court said.

In this case, a transaction of high value require a careful examination and hence an instruction to refer the transaction to the TPO, is consistent with the spirit of the Income-tax Act. We are of the considered view that challenge to the impugned instruction on the ground of suspect classification must fail, the court observed.

According to Sony India, the discretionary powers of the assessing officer, under section 92 C of I-T Act, to refer a case to the TPO has been taken away by this instruction as it makes it mandatory to refer all cases above Rs 5 crore to the TPO.

Meanwhile, the Income-tax Appellate Tribunal (ITAT) has set up a special bench for clearing the air on issues arising from cross-border transactions.

One of the issues ITAT is seeking to settle is the question over the legality of the CBDT instruction which stipulated that any cross-border transaction worth Rs 5 crore or more should be referred to the TPO for assessment.

The ITAT decided to take up this issue following a controversy created by an appellate commissioners order in the case of Aztec Software & Technology Services.

The Bangalore-based software company challenged the legality of instruction No. 2 and observed that the assessee should have been given an opportunity to be heard before the commissioner transferred the case for transfer pricing assessment.

Transfer pricing rules first came into force in India in 01 in view of the increasing participation of multi-national entities in economic activities in the country.

This has given rise to new and complex issues emerging from transactions entered into two or more enterprises belonging to the same multi-national group.

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