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 Section 10 of the Income-tax Act, 1961

Maintenance of documents for transfer pricing
May, 12th 2008

The Transfer Pricing regulations introduced in the Income-tax Act in 2001 are in fact under development stage. In the absence of experience, very onerous and impractical rules have been made for maintaining information and documents by the taxpayer.
 
Further, in order to ensure proper compliance of these provisions, Assessing Officers (AOs) have been given sweeping powers including the authority to impose penalty.

This all has resulted in unnecessary harassment of the taxpayers. In this context, the Delhi Tribunal has recently pronounced a landmark judgment in case of Cargill India Pvt Ltd vs DCIT (110 ITD 616) which lays down some practical guidelines in respect of maintenance of information and documents by an assessee, issuance of notices by the AOs and levy of penalty on the assessee.

The Income-tax Act provides that every person who has entered into an international transaction shall keep and maintain the prescribed information and documents. The law also empowers the AO to require any person who has entered into an international transaction to furnish "any" information or document as prescribed in the Rules.

In the above context, an interesting problem arose in the case of Cargill India Pvt. Ltd. vs DCIT (110 ITD 616). The Transfer Pricing Officer (TPO) asked the assessee to furnish entire information and documents maintained under IT Rules.

Rule 10D of IT Rules prescribes various types of information and documents which an assessee should maintain but the Tribunal observed that it would be in the rarest of cases that all the clauses of the Rules would be attracted in any one particular case. It was held:

"Therefore, it is clear that information prescribed under rule 10D in different column is voluminous, alternative and it would have to be seen as to what information and from which clause, is required on the facts of the given case."

In the instant case, the TPO issued a notice and called for all' the information, which had been maintained by the assessee.

The Tribunal held: "The notice is a serious notice, as its non-compliance within the specified time would lead to imposition of penalty which may amount to several crores. It is not a routine notice which can be casually issued calling for any information or all prescribed information."

If any person fails to furnish any information or document, he shall be liable to a penalty equivalent to 2 per cent of the value of international transaction. However, no penalty can be imposed, if the failure is due to a reasonable cause'. In the instant case, there was a small delay in the furnishing of information which was voluminous and highly technical in nature.

The Hon'ble Tribunal held that: "The penalty under section 271G can be imposed only if the default is held to be proved to be without reasonable cause.... In the instant case, no attempt had been made by the revenue to look into, examine or refute the claim of reasonable cause put forth by the assessee. The delay, if any, in the submission of information or documents within the prescribed time was due to a reasonable cause.

Therefore, the penalty was not sustainable on account of that ground also."

The judgment in case of Cargill (supra) will go a long way in interpreting the TP provisions in a practical manner- that a taxpayer is required to maintain only relevant information and documents, and that the AO is entitled to ask for relevant specific information only. 

H P Aggarwal

 
 
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