Friday, 23 October 2015

Change in method of selecting cases for TP assessment- CBDT instructions


Last Friday,  CBDT has issued instruction No. 15/2015  to give guidance to Assessing officer ("AO") and the Transfer Pricing officer ("TPO") regarding TP assessments. Amongst many concepts addressed, owing to legislative, procedural and structural changes in the TP landscape, a reference to TPOs henceforth would not be on the basis of  value of international transactions but would be on the basis of risk parameters.

With growing pendency of cases and already strained revenue resources, risk based selection of cases for TP Audit is expected to streamline the TP Audit process towards 'quality based scrutiny' of cases requiring genuine attention. Resultantly, the taxpayers can also now focus their energies on high risk areas, and deploy their own risk assessment techniques in order to strengthen their documentation and defence files such that they are able to effectively manage TP compliance.

The Chief Commissioners of Income-tax (International Tax) at each jurisdiction (Chennai, Bangalore etc) are expected to draft appropriate guidelines, which would help in selecting the cases for TP audit by the offices falling within the said jurisdiction.  It is also stated that the number of such 'important and complex' cases that would be handled by a TPO would be limited to 50.

Further, in case the Assessing Officer ("AO") seeks to refer any additional transaction over and above the transactions reported in the form 3CEB or seeks to refer a transaction, which has been reported in the form 3CEB with a caveat or statement that the taxpayer does not consider it as an international transaction, the AO is required to provide an opportunity of hearing to the taxpayers before referring the same.   This could be relevant for transactions such as Advertisement and Marketing expenditure, where the taxpayer believes that such expenditure would not be subject to TP in the absence of an underlying arrangement between the associated enterprises.

The above guidance provided in instruction applicable only to scrutiny of 'international transactions'. A separate guidance for specified domestic transactions would be issued.

As the time limit for referring cases to the TPO for the FY 2011-12 expired on March 31, 2015 and with the cases having just been selected for scrutiny for the FY 2013-14  [as the time line for issuing scrutiny assessment notices under section 143(2) of the Act expired on September 30, 2015], this change could be expected to impact the audits for FY 2013-14 and subsequent years.  
The introduction of risk based selection of cases for TP audits also indicates India’s intention to adopt Action 13 of the OECD’s Base Erosion and Profit Shifting project, i.e., on TP Documentation and Country-by-Country Reporting (CbCR). This is because one of the articulated purposes of CbCR has been to assist in risk assessment

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