India: CBDT Issues Revised Guidelines For Transfer Pricing Assessments

Last Updated: 25 February 2016
Article by Trilegal .

The Central Board of Direct Taxes has issued instructions on 16 October, 2015 to give guidance to Assessing Officers and Transfer Pricing Officers regarding transfer pricing assessments. The guidelines provide a cap on the number of important and complex cases each Transfer Pricing Officer can be assigned and put emphasis on audits being based on risk rather than the value of international transactions.

The Indian legislature first crafted the transfer pricing regulations under the Finance Act, 2001 by introducing Sections 92 to 92F in the Income Tax Act, 1961 (Act), effective from the financial year ending March 2002. The transfer pricing regulations were introduced with an objective to prevent the country's tax base from getting eroded as a result of tax planning strategies adopted by multinational enterprises.

However, with cross-border transactions increasing in number and complexity, there has been a significant rise in transfer pricing litigation in India. Statistics reveal that India is ranked in the top three countries of the world for the maximum number of transfer pricing disputes with more than 4000 disputes pending before the Dispute Resolution Panel, CIT(A) and Income Tax Appellate Tribunal.

In order to reduce the rising volume of transfer pricing litigation and to provide clarity and procedural uniformity, the Central Board of Direct Taxes (CBDT) has recently issued Instruction No. 15/2015 on 16 October, 2015 (Instruction) replacing Instruction No. 3/2013 dated 20 May, 2003 to give guidance to Assessing Officers (AOs) and Transfer Pricing Officers (TPOs) regarding transfer pricing assessments.

Some key aspects of the Instruction that are likely to impact the transfer pricing landscape of the country are highlighted below:

1. Reduced Workload of TPOs: The Instruction sets a cap on the number of cases that can be assigned to each TPO to not more than 50 important and complex cases. This is a step in the right direction as it will help improve the quality of assessments by substantially reducing the workload of TPOs and thereby enabling them to devote their time suitably on the cases assigned to them.

2. Recording of Satisfaction: The Instruction sets out the circumstances under which the AO must give the taxpayer an opportunity of being heard and, thereafter, record his satisfaction before making a reference to the TPO. These circumstances are:

(a) No accountant's report (Form 3CEB) has been filed by the taxpayer;

(b) The taxpayer has not declared one or more international transaction(s) in Form 3CEB;

(c) Where a transaction is declared in Form 3CEB with qualifying remarks that such transaction is not an international transaction or it does not have an impact on taxpayers income.

The above requirement could act as a fetter on the powers of the AO in making a reference to the TPO and also curb the powers of the TPO in making unnecessary adjustments in determining 'arm's length price' for these transactions. For instance, the TPO in the case of Vodafone and Shell assumed jurisdiction alleging that the issuance of shares by the Indian subsidiary to its foreign associated enterprise amounted to an 'international transaction' for which 'arm's length price' ought to have been received and the shortfall in capital receipt was added to the income of the taxpayers by making transfer pricing adjustments to the tune of Rs. 23,000 crores. The matter was subsequently brought before the Bombay High Court and last year the Court struck down the absurd adjustments made by the TPO and held that it was not an 'international transaction' and therefore, the TPO did not have any jurisdiction to determine the 'arm's length price' of these transactions. The Income Tax Department has since decided not to file an appeal before the Supreme Court and this move has been viewed positively by foreign investors and also seen as a step in the right direction by the present Government in order to rid India of the label of being overly tax aggressive.

3. Risk based Audits: Reference to TPOs will now be based on risk assessment rather than the value of international transactions. This will bring into focus loss making and low margin companies and companies whose associated enterprises are located in low or no tax jurisdictions.

4. Maintenance of data base: A specific format has been provided for maintaining records of assessments. This will ensure commonality and uniformity in approach on identical issues which will result in reduced litigation.

Historically, CBDT has not been very active in issuing transfer pricing guidelines and therefore due to a lack of clarity in the Indian provisions, TPOs have had to increasingly place reliance on Australian and US transfer pricing guidelines. Guidelines on transfer pricing provisions were therefore long overdue and the current Instruction is a welcome relief as they will help in bringing certainty and uniformity in assessments. This will help in reducing the rising volume of transfer pricing litigation and consequently restore investor confidence in the Indian tax regime.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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