How To Handle A Transfer Pricing Audit For International Cases under Indian Income Tax Act, 1961 – Some Practical Keynote Points
B.COM(H), FCA, CIFRS,CBV
Transfer pricing (TP) is a concept of taxation which seeks to tax transactions based on propriety on not just the transaction value at which the transaction was undertaken but a Arm’s Length Value. This one single mere fact makes the same vulnerable to so many different views and subjectivity between the assessee and Income Tax Department. Assumingly, as assessee you have received a Transfer Pricing Audit/Reference Notice u/s92CA of Income Tax Act,1961, this article aims to discuss what shall be your mechanism for Successfully Handling of Such TP Audit.
As per Section 92CA,
Where any person, being the assessee, has entered into an international transaction or specified domestic transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Principal Commissioner or Commissioner, refer the computation of the arm’s length price in relation to the said international transaction or specified domestic transaction under section 92C to the Transfer Pricing Officer.
Firstly, not in all cases of Scrutiny u.s 143, you would find your case being referred to TPO even in case of International Transactions done by you. Normally, the Income tax Department have quantum of Turnover criterion say Rs 10 Cr etc to atleast consider it to refer to TPO during scrutiny. Though it is not something freezed and even suspicious pricing may force ITO to refer to TPO also.
Say that you were subjected to Scrutiny under Income Tax and now the case has been referred to TPO, you need to follow a certain recommended modus operandi to ensure high success rate in handling the case. Some of Key aspects are as under:-
- a)Assessee needs to ensure all the records as prescribed under Section 92D and Rules prescribed thereunder are available and duly collated in one Master File.
- b)All the Financials Statements to be Filed in Separate File including the Basic Notice papers as seeked by TPO.
- c)Every Year all these Papers as prescribed in 92D along with Computation of Arm’s Length Price shall be Collated and Certified by Chartered Accountant in Practice so as to Constitute a “Transfer Pricing Study Report”. Note this different from TP Certification conducted by Chartered Accountant and Filed as Form 3CEB every year for such Assessee at the time of Annual Filing.
- d)TP Study Report shall constitute of Detailed Study of assessee and transactions undertaken with Associated Enterprises, Nature of Such Transactions and How the Method of Computation have been arrived at.
- e)Further, TP Study should give a clear idea about the transactions undertaken during that year and what is ALP computed by such signing professional. Any divergence must be treated in the Income Tax Return as Additional Income and tax thereon shall become payable. Note there are provisions which make TP Adjusted Income Divergence status Quo with Concealed Income, hence due care in TP is Very Significant.
- f)Once you are done with all the documents and TP Study Report, IT Returns, Form 3CEB etc and all other documents as required by TPO, one must be prepared for Hard Grilling by the Income Tax Department on the Hearings in the case. One Must be 100% confident on the Transactions nature and computation modus with Legal Arguments to back up to ensure you are able to present the case better.
- g)Make Sure all the communications and correspondences are duly made in writing and such submissions are acknowledged from IT Department.
- h)All Emails and Soft Copies should be Marked only to Email Id’s as mentioned in the Notice only.
- i)In case of Conflict between you and Income Tax Department, you can move to higher appeals as the case may be.
Trust the Above would be Useful in helping you Successfully Handling Transfer Pricing Audit by Indian Income Tax Department.