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Sizing up transfer pricing regime
March, 02nd 2007

In India no separate assessment order of transfer pricing adjustment is required to be issued, as the order passed by the transfer pricing officer (TPO) merges with the assessment order passed by assessing officer (AO). Hence, the time limit for completing transfer pricing assessment is coterminous with the normal limitations.

This limit was 24 months from the end of the relevant assessment year. The Finance Act, 2006 reduced this limit to 21 months. This step was not consistent with the international practices and failed to appreciate the complexities involved in transfer pricing assessments.

Appreciating that determination of arm's length price is fact intensive, many countries extended the time limit for completing assessment for transfer pricing adjustments.

It varies from two years from the date of filing return (Columbia) to 10 years (China). In the UK the time limit is six years from the accounting year end (may be extended up to 21 years in case of negligence or fraud), while in Australia there is no time limit on the tax authority to make transfer pricing adjustment. In India, considering the practical difficulties in transfer pricing assessments, it was argued at various forums that transfer pricing assessment be de-linked and time limit for completing the assessments be extended.

The provisions regarding time limit for completion of assessments are contained in Sections 153 and 153 B of the Income-Tax Act, 1961. The Finance Bill proposes to amend these sections to provide sufficient time to TPOs as well as AOs to complete assessment where a reference has been made to the TPO.

The revised time limits would be 33 months from the end of the assessment year concerned. At present, there is no time limit prescribed for TPOs for passing orders. The Bill further proposes to provide that the TPO shall determine the arm's length price at least two months before the expiry of the new statutory time limit for making the assessment or reassessment.

Thus, the time limit for the TPO to pass an order will be 31 months from the end of the assessment year concerned.

Order passed by TPO

The existing provisions require that an AO would proceed to compute the total income of a taxpayer having regard to the arm's length price determined by the TPO. A controversy had arisen whether the order passed by the TPO was binding on the AO.

The Delhi High Court, in Sony India (P) Ltd (288 ITR 52), held that the AO is not bound by the order passed by the TPO. The Bill proposes to amend sub-section (4) of Section 92CA so as to provide that, on receipt of the order passed by the TPO, the AO shall proceed to compute the total income of the assessee under sub-section (4) of Section 92C in conformity with the arm's length price determined under sub-section (3) of Section 92CA by the TPO. A view can be that due to the proposed amendment the order passed by the TPO would be binding on AOs.

Both these amendments will take effect from June 1, 2007, and shall also be applicable in cases where a reference to the TPO was made prior to July 1, 2007, but the TPO did not pass the order under sub-section (3) of Section 92CA before the said date.

S. P. Singh
Tehmina Latiwala

(The authors are tax advisor and manager, respectively, Deloitte Haskins & Sells.)

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