Constitutional Validity of transfer pricing provisions

Where the AO issued reopening notices to the assessee, a foreign company, on the ground that income had escaped assessment because as per the transfer pricing provisions the profit charged by the assessee on services rendered to its associated enterprises was abnormally low and the same was challenged by the assessee on various issues, HELD, dismissing the Petition that:

(1) There is no lack of Legislative competence in enacting the transfer pricing provisions and making them applicable to foreign companies. The provisions seek to remedy the mischief of multinational companies of allocating profits in intra group transactions to outside jurisdiction resulting in tax evasion;

(2) The transfer pricing provisions are applicable to a well defined class which meets the test of intelligible differentia. It also meets the test of rational relationship to the object i.e. to determine the real income. There is no ambiguity or absurd consequence of application of Chapter X to persons who are subject to jurisdiction of taxing authorities in India;

(3) There is no requirement to establish transfer of profits outside India or evasion of tax before applying the transfer pricing provisions;

(4) The fact that under the FERA – RBI approval the assessee cannot charge more than particular price cannot control the arms’ length price;

(5) There is no requirement to give a hearing at the stage of making reference under Section 92 CA of the Act because the decision to make a reference does not visit the assessee with any civil consequence;

(6) The fact that in the recorded reasons, the AO referred to the inapplicable provisions of s. 92 as it stood prior to amendment w.e.f. 1.4.2002 and the order of the TPO passed in respect of a subsequent assessment year is not a bar for reassessment.

For other transfer pricing judgments see: Moser Baer India Ltd vs. ACIT (Delhi High Court), Philips Software vs. ACIT (ITAT Bangalore) and Sony India vs. DCIT (ITAT Delhi)