Transfer pricing audit cycle
Reference to Transfer Pricing Officer
- Section 92CA provides for procedure for reference to a Transfer Pricing Officer (‘TPO’) of any issue relating to computation of ALP in an international transaction. The procedure is as under:
- The option to make reference to TPO is given to the Assessing Officer. He may do it if he considers it necessary or expedient to do so.
- As per CBDT instruction in 2016, the AO has to make mandatory reference to TPO only under following TP risk parameters assisted by CASS and compulsory manual selection on the basis of earlier non-compliance etc.
- The AO has to take the approval of the PCIT / CIT before making such reference.
- Any JCIT/DCIT/ACIT can be appointed as TPO
- If such reference is made, the TPO can call upon the assessee to produce evidence in support of computation of ALP made by him
- The TPO can also determine the ALP of other international transactions identified subsequently in the course of the proceedings before him, which were not referred by the AO as per section 92CA(2B).
- Where in respect of an international transaction, the assessee has not furnished the report under section 92E (report in Form 3CED) and such transactions comes to notice of the TPO during the course of proceedings, the TP provisions would apply as if such transactions are referred to the TPO
- The TPO has to pass an order after considering the evidence, documents, etc produced by the assessee. The TPO may either accept the ALP determined by the assessee or reject it. If the TPO disregard the ALP of the assesse, the onus of determining the ALP transfers to the TPO. A copy of the order has to be sent to the AO and the assessee.
- The order of the TPO determining the ALP shall be considered by the AO and the AO shall proceed to compute the total income in conformity with the ALP determined by the TPO
- Sec 92CA(3A) provides that the TPO has to pass an order atleast 60 days before the expiry of the time limit prescribed under sect 153 or section 153B for making an order of assessment.
- If the proceedings are stayed by Courts or where the reference for exchange of information is made by the Competent Authority, the time available to the TPO for making an order after excluding the aforesaid time is less than 60 days then such remaining period shall be extended to 60 days
- TPO has powers to rectify the order under section 154 if any mistakes apparent form the record. Rectification can be done within 4 years from the end of the FY in which the order sought to be amended was passed
- The TPO can exercise all or any of the powers specified in clause (a) to (d) of section 131(1) or section 133(6) for determining the ALP
Powers of Assessing Officer to compute ALP
- Section 92C(3) and (4) gives power to the AO to determine the ALP under the following circumstances and also empowers the AO to recomputed total income of the assessee.
- It is also provided that deduction under section 10AA and Chapter VI A shall not be allowed from additional income computed by him.
- Circumstances under which the TPO may invoke the power to determine ALP are as follows:
- The price charged or paid in an international transactions has not been determined in accordance with section 92C(1) or (2)
- Any information and documents relating to an international transaction has not been maintained in accordance with the provisions of the Act
- The information or data used in computation of he ALP is not reliable or correct
- The assessee has failed to furnish within the specified time, any information or documents required to be furnish in pursuance to a notice
Which of the following statement is correct?
- AO shall in his / her own discretion proceed to verify if the ALP of the international transaction as determined by the assessee are in order
- AO shall in his / her own discretion refer the case to the TPO to verify if the ALP of the international transaction as determined by the assessee are in order
- The AO has to make mandatory reference to TPO following TP risk parameters assisted by CASS and compulsory manual selection on the basis of earlier non-compliance etc., and the AO has to take the approval of the PCIT / CIT before making such reference
The AO has to make mandatory reference to TPO following TP risk parameters assisted by CASS and compulsory manual selection on the basis of earlier non-compliance etc., and the AO has to take the approval of the PCIT / CIT before making such reference
Order of assessment
- Once the TPO has passed the order on the international transaction, the AO has to incorporate the same in his / her income tax order and re-compute the income / loss of the assessee.
- Since transfer pricing adjustments often involves huge amounts and involves non-residents, the CBDT has come with alternate panel to fast track the dispute resolution mechanism.
- The AO prepares a draft order incorporating the order of the TPO and issues the same to the assessee.
- The assessee has two options, either to accept the order and appeal before the Commissioner of Income Tax (Appeals) or to raise objection before the Dispute Resolution Panel (‘DRP’)
Dispute Resolution Panel – Eligible assessee
- Dispute Resolution Panel (‘DRP’) is an alternate dispute resolution mechanism to expedite disputes relating to Chapter X of the Income Tax Act, a foreign company or a non-resident on a fast-track basis.
- The assesses have an option of following the Appellate route [CIT(A)] or DRP in case of disputes.
- DRP means a collegium comprising of three Principal Commissioners or Commissioners of Income-tax constituted by the CBDT for this purpose
Eligible assessee means
- any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of section 92CA; (in other words additions on account of TPO order)
- Foreign company
- Non-Residents (Finance Budget 2020 has proposed it)
DRP – Procedural aspects
- In case of eligible assesses, the AO has to forward the draft of the proposed order of assessment (‘draft order’) an any variations in the income or loss returned which is prejudicial to the interest of the assessee.
- Budget 2020 has extended the scope of the draft order in additional cases when the order is prejudicial to the interest of the assessee even in the cases where there is no variation in the income or loss returned.
- On receipt of the draft order the assessee has 2 options
- File his acceptance of the variation to the AO
- File his objections if any to such variations with the DRP and AO
- The AO will proceed to complete the assessment based on the draft order, if the assessee has intimated the acceptance of the draft order or the AO has not received any objection within 30 days from the receipt of the draft order
- If the assessee does not approach the DRP, then the demand if any, raised by the AO becomes payable. The assessee has the option to appeal against the order of the AO before the Commissioner of Income Tax (Appeals).
- If the assessee has raised an objection upon the draft order, DRP will take up the case for issuing directions to the AO to enable the completion of assessment.
- The DRP shall consider / examine the following before issuing directions namely
- Draft order
- Objections raised by the assessee
- Evidence furnished by the assessee
- Report of TPO, valuation officer or any other authority
- Records relating to draft order
- Evidence collected and / or enquiries made
- The DRP may make such other enquiries before issuing directions
- DRP has powers to confirm, reduce, enhance the variations proposed in the draft order. However, it cannot set aside or seek the AO make further enquiry before making assessment.
- If the members of the DRP differ in opinion on any point, the point shall be decided according to the opinion of the majority of the members.
- The directions of the DRP is binding on the AO and the AO cannot raise objection or appeal against the directions of the DRP.
- The DRP shall not pass prejudicial directions to the assessee unless an opportunity of heard is given to the assessee
- The DRP has to issue directions before the expiry of 9 months from the end of the month in which the draft order was forwarded to the eligible assessee
- Once the directions from the DRP are received the AO shall complete the assessment without providing any further opportunity to the assessee within 1 month from the end of the month in which directions are received. The assessee will be obliged to pay the demand amount only upon the final order passed by the AO.
- The order of the AO pursuant to the directions by DRP can be challenged by the assessee before the Income Tax Appellate Tribunal (‘ITAT’). The AO cannot challenge the directions of the DRP.