The Mumbai Bench of the Income-tax Appellate Tribunal held that an Assessing Officer cannot “mechanically” refer a taxpayer’s international transactions to a Transfer Pricing Officer for a determination of the arm’s length price, but must first independently conclude that the taxpayer did not determine the arm’s length price or did not maintain appropriate documents based on statutory provisions.
The tribunal further held that no transfer pricing adjustment can be made in instances when the taxpayer enjoys the benefit of a “tax holiday” or when the tax rate of the related party’s country of residence is greater than the tax rate in India. In other words, there cannot be a transfer pricing adjustment when tax avoidance is not possible. The case is: DCIT v. Tata Consultancy Services Ltd. (ITA no. 7513/2010)
The assessment year at issue was 2005-06. The Assessing Officer—following a then-applicable instruction from the Central Board of Direct Taxes that required a mandatory referral to the Transfer Pricing Officer to determine the arm’s length price when the aggregate value of the international transactions exceeded INR 5 crores—referred the taxpayer’s international transactions to the Transfer Pricing Officer for a determination of the arm’s length price. The Transfer Pricing Officer made a transfer pricing adjustment that was “mechanically” incorporated in the Assessing Officer’s order.
The taxpayer sought administrative review, and the Commissioner deleted the transfer pricing adjustment.The tax administration filed for judicial review, and the tribunal concluded that the Assessing Officer must have a prima facie belief, based on certain information or documentation, that a referral to the Transfer Pricing Officer was required. The tribunal also noted that there can be no transfer pricing adjustment in instances when there would be no tax avoidance.
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