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Increase in time limits for TP assessment
March, 06th 2007

The provisions of the Finance Bill 2007 have proposed an amendment in the time-frame for completion of assessments, where the cases are referred to transfer pricing officers. Under the present scheme, the assessing officer (AO), in certain instances, makes a reference to the transfer pricing officer (TPO) for determination of arm's length price (ALP) of transactions with associated enterprises. The AO in parallel continues with the assessment proceedings on other matters. After receiving the TPO's order, the AO is currently required to compute the income of the assessee having `regard' to the arms length price, and pass a consolidated assessment order. Presently, the time limit for the completion of both these assessment proceedings is 21 months from the end of the relevant assessment year. For example, for AY 2004-2005 (that is, the financial year ended March 31, 2004), the time limit for the completion of these assessment proceedings was December 31, 2006.

However, an increased time frame has been proposed with effect from AY 2005-06, in cases where a reference has been made to the TPO. In such cases, the time limit for completion of assessment proceedings by the AO has been increased to 33 months from the end of the relevant assessment year, with the TP assessment proceedings to be completed 60 days earlier.

An exception would arise where, for example, for the AY 2005-06, the TP order has already been passed on or before May 31, 2007. In such a case, the time-limit for completion of the assessment proceedings would continue to be December 31, 2007.

The increased time-frame as above, should give the Department adequate amount of additional time to assess cases having intricate transfer pricing issues, understand business and economic factors, which are so crucial in deciding upon the arms length nature of international transactions.

Another important change is the requirement for the AO to compute the income of the assessee in conformity with the order passed by the TPO, thereby overruling the principle in the recent Delhi High Court decision in case of Sony India (P) Ltd vs CBDT (2006) 157 Taxman 127 (Del), which held that the order of the TPO is not necessarily binding upon the AO. This decision, in effect, provided a technical fallback avenue to assessees, and make representations to the AO, in case the TPO were not to accept the arms length nature of the pricing. With the proposed amendment, there would be no discretion upon the AO to depart from the arms length price as computed by the TPO.

(Sanjay Tolia is executive director and Dinesh Supekar, principal consultant, PricewaterhouseCoopers.)

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