Section 92-C of the Income-Tax Act, 1961 deals with arm's length price (ALP). Sub-section (1) states that the ALP will be determined by applying any one of the six methods specified in clauses (a) to (f) or `such other factors' as the Central Board of Direct Taxes (CBDT) may prescribe. Section 92-C(2) states that the manner in which such method is to be applied will also be prescribed by the CBDT.

This power of the Board prescribes the manner and method, and is in addition to the general power to issue instructions to subordinate authorities under Section 119. Therefore, the statute envisages a role for the CBDT in relation to both the methods to be applied and the manner of its application for ALP computation.

Section 92-C(3) requires the Assessing Officer to form an opinion on the existence of the factors enumerated in clauses (a) to (d) as a pre-condition to himself determine the ALP. In other words, acceptance of the ALP declared by the assessee is the rule and its rejection the exception.

However, under the proviso to Section 92-C the assessee has to be given an opportunity of being heard before the Assessing Officer proceeds to determine the ALP. It is only thereafter that under Section 92-C(4) the Assessing Officer proceeds to compute the total income `having regard to the ALP so determined by him'.

Thus, there are adequate safeguards built into Section 92-C to ensure that determination of the ALP by the Assessing Officer is not mechanical.

Condition in Section 92-CA

One condition spelt out in Section 92-CA for reference to the TPO is the opinion of the Assessing Officer that it is `necessary or expedient so to do'. There is no gainsaying that power conferred on an authority, particularly a discretionary power, cannot be exercised mechanically. What is `necessary or expedient' will depend on the facts and circumstances of each case and the satisfaction of the Assessing Officer in this regard will have to be based on some objective criteria.

On the other hand, the relatively insignificant value of the transaction may make it inexpedient for the matter to be referred to the TPO.

It is not possible to anticipate the instances that may necessitate the invoking of the discretion vested in the Assessing Officer in this regard. It is trite that any misuse of such exercise of discretion can be corrected by way of judicial review by statutory appellate authorities and ultimately the court.

The words `necessary and expedient' occurring in other provisions of the Act and other statutes have been interpreted judicially to admit of a strict construction permitting the power to be used only in the manner and subject to the conditions stipulated in the provision.

There is nothing in Section 92-CA itself that requires the Assessing Officer to first form a considered opinion in the manner indicated in Section 92-C(3) before making a reference to the TPO.

It is not possible to read such a requirement in Section 92-CA(1). However, it will suffice if the Assessing Officer forms a prima facie opinion that it is necessary and expedient to make such a reference.

One possible reason for the absence of such a requirement is that the TPO is expected to perform the same exercise as envisaged under Section 92-C(1) to (3) while determining the ALP under Section 92-CA(3).

The latter part of Section 92-CA(3) unambiguously states that the TPO shall by an order in writing determine the ALP in relation to the international transaction in accordance with sub-section (3) of Section 92-C. It will be pointless to duplicate this exercise at two stages. On the other hand, the scheme is that after the TPO determines the ALP, the matter revives before the Assessing Officer and in terms of Section 92-CA(4) the Assessing Officer computes the total income having regard to the ALP determined by the TPO.

Power of assessment

Two aspects require to be taken note of in this context. The Assessing Officer will necessarily have to give an opportunity to the assessee after receiving the report of the TPO and before he finalises the assignment computing the total income.

Second, the provisions do not mandate that the Assessing Officer is bound to accept the ALP, as determined by the TPO. He can always be persuaded by the assessee as that stage to reject the TPO's report and proceed to determine the ALP himself.

The Assessing Officer is the authority to finalise the assessment and that power cannot be usurped by the TPO or any other authority contrary to the scheme of the Act.

By preserving the power of the Assessing Officer to determine the ALP even after its determination by the TPO, full effect can be given to the words " having regard to" occurring in both Sections 92-C(4) and 92-CA(4).

In view of this settled legal position, the expression `having regard to' in Sections 92-C(4) and 92-CA(4) enables the Assessing Officer to consider not only the report of the TPO but any other material that may be placed before him by the assessee to arrive at a different conclusion.

This also fortifies the view that the report of the TPO is not binding on the Assessing Officer.

The interpretation does not prejudice the assessee because in effect the assessee gets two opportunities to prove that the price declared by it requires acceptance.

The first is before the TPO in terms of Section 92-CA(3) and the second before the Assessing Officer under Section 92-CA(4) after the receipt of the report of the TPO.

Any possible prejudice is thus negated by the principles of natural justice that are written into these provisions in large measure.

In the light of these principles, the Delhi High Court in Sony India (P.) Ltd. v. C.B.D.T. (2006; 157 Taxman 125) upheld the validity of the instructions dated May 20, 2003 issued by the CBDT to the effect that where the aggregate value of international transactions exceeds Rs 5 crore, a reference should be made by the Asssessing Officer to the TPO for determining the ALP.

According to the court, this instruction is consistent with the statutory provision and cannot be struck down as being arbitrary or unreasonable.

Further, it does not whittle down the authority of the Assessing Officer who may be guided by the report of the TPO without being bound by it.

H. P. Ranina
(The author, a Mumbai-based advocate specialising in tax laws)