President’s Message

Since the liberalization of the economy towards the close of the last millennium India has made its presence in the Global market and has been a significant player in International Trade. This made international transactions obligatory as a necessary incident of globalization. The Finance Ministry has repeatedly declared that international transactions will be viewed liberally and the taxation of international transactions would not face hassles. It is in this context that Chapter X dealing with computation of income from international transactions will have to be considered. Sec. 92B of the Income-tax Act defines “International transaction” to mean a transaction between two or more associated enterprises, either or both of whom are non-residents, satisfying the other conditions set out therein. The term “Associated enterprise” is defined in sec. 92A. Sec. 92C deals with “Computation of arm’s length price”. Sec. 92CA deals with “Reference to Transfer Pricing Officer” and enables the Assessing Officer, if he considers it necessary or expedient so to do, to refer the computation of arm’s length price in relation to the international transaction to the Transfer Pricing Officer.

Considering the assurances given by the Government, unless there is reason to believe that a transaction is a devise to avoid tax, there does not appear to be any justification to refer a transaction to the Transfer Pricing Officer for investigation. The Scheme of the Income-tax Act is to make an assessment on the basis of the return, unless the Assessing Authority has reason to believe that the return is not correct or complete. In other words, there is an endeavour on the part of the Government to introduce an element of confidence in the tax-payer, the acknowledged slogan of the department being “We trust you, you trust us”. This necessarily requires that except where the Assessing Authority has reason to believe that a transaction is open to doubt as a devise to avoid tax, it has to be prima facie accepted. In other words, unless the Assessing Authority has reason to doubt the correctness of a transaction, there is no justification to make an investigation or enquiry. This is underlying the assessment procedure envisaged under sec. 143 of the Income-tax Act. Hence there does not appear to be any justifiable reason to assume that in respect of international transactions a different procedure should be adopted. The assurance given by the Minister often times is also to the effect that acceptance is the norm and enquiry is the exception. While this is so, with regard to the domestic transactions, it stands to reason that there cannot be a different procedure for international transactions. On the other hand, the principle of mutual trust should apply in a greater measure for international transactions, not only for commercial reasons but also to maintain the image of the Nation.

It is in this context that the recent decision of the Full Bench of the Income Tax Appellate Tribunal comprising the President and four Members in the case of Aztec Software Technology Services assumes great relevance and importance. One of the issues which arose before the Full Bench in the above case was whether it was a legal requirement of Chapter X of the Income-tax Act that the Assessing Officer should prima facie demonstrate that there is tax avoidance before invoking the relevant provision.

The Full Bench, after considering the issue in detail, concluded that the plain reading of the section does not require that the Assessing Officer should form a considered opinion in the manner indicated in sec. 92C (3), before making a reference to the Transfer Pricing Officer. While coming to the above conclusion, the Bench referred to the decision of the Delhi High Court in the case of Sony India Private Ltd. (288 ITR 52). The conclusion arrived at by the Full Bench would indicate that the Assessing Officer can mechanically refer the determination of arm’s length price to the Transfer Pricing Officer, without satisfying the requirements of sec. 92C (3). In fact the judgment of the Delhi High Court which is heavily relied on by the Bench does not support such a view.

The High Court was considering the question as to whether the Assessing Authority should go through the entire exercise envisaged in sec. 92C and arrive at a conclusion that the price declared is not to be accepted before making a reference. While it can be assumed that the Assessing Authority need not go through the entire exercise before making a reference, it would open the flood gates if Chapter X is interpreted to enable the Assessing Authority to mechanically refer the determination of arm’s length price to the Transfer Pricing Officer. The section requires the previous approval of the Commissioner for reference and a reference cannot be made to the Commissioner without a reasonable satisfaction being arrived at by the Assessing Officer. If, as held by the Tribunal, a prima facie demonstration is not required to be done by the Assessing Officer, the approval of the Commissioner itself would have no meaning. An approval of the superior authority has to be based on a valid case being presented by the Referring Authority; otherwise, a reference as well as the approval would become meaningless. While it may be argued that a final conclusion need not be arrived at by the Assessing Authority before making a reference, it would whittle down the safeguard provided under the statute, if Sec. 92CA is interpreted to empower the Assessing Officer to seek the approval of the Commissioner and make a reference in a mechanical manner.

The order of the Tribunal will have far reaching consequences in so far as every case is likely to be referred by the Assessing Officer to the Transfer Pricing Officer for the determination of arm’s length price and would encourage the abdiction of responsibility by the Assessing Officer. This is particularly so, in view of sub-section (4) introduced by the Finance Act of 2007 whereunder the Assessing Authority is bound to proceed to compute the total income in conformity with the arm’s length price determined by the Transfer Pricing Officer. The decision of the Full Bench requires reconsideration, considering the impact it can have on assessment of international transactions, not only in the matter of procedure but also in the matter of substantial assessment.

(V. RAMACHANDRAN)