Amadeus High Court Ruling on TPO's Power to Suo-Moto Scrutinise International Transactions

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In a recent ruling in the case of Amadeus India , Delhi High Court has affirmed an important pronouncement of Tax Tribunal on Transfer Pricing Officer's ('TPO') power to suo-moto scrutinize international transactions. It is pertinent to note that the High Court decision pertains to the 'erstwhile law' ie as it was prior to amendment by Finance Act, 2011.

Applying the rule of literal construction for interpretation of statutes, the High Court held that based on a plain reading of the 'erstwhile law', it was unequivocally clear that Transfer Pricing regulations mandated a 'reference' of the international transaction by the Assessing Officer to the TPO, before the latter could scrutinize the same. Rule of 'literal construction' is a fundamental principle of statutory interpretation which postulates that statutory language should be given its plain and clear meaning unless there is an ambiguity or the adoption of plain meaning leads to an absurd result. The principle has been clearly articulated by Apex Court in Afcons Infrastructure wherein it was held that “where the words of the statue are in themselves precise and unambiguous... the words themselves best declare the intent of law giver and it would not be open to the courts to adopt a hypothetical construction on the ground that such construction is more consistent with the alleged object and policy of the Act.”

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Amadeus Ruling

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Amadeus India Private Limited vs CIT (ITA 938/2011)

Amadeus India Private Limited vs CIT (ITA No. 5203/Del/2010)

3Afcons Infrastructure Ltd. vs. Cherian Varkey Construction Co. (P) Ltd [(2010 Vol. 8 (SCC) 24]

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Under the scheme of Indian Tax Code, the Assessing Officer is a 'generalist' examining regular tax issues whereas the TPO is a specialized officer entrusted with

the responsibility of Transfer Pricing audit. Under the above scheme, it is debatable whether the Assessing Officer is competent to discern all international transactions

(whether or not explicitly reported) in any particular case. Given TPO's specialization, the TPO can read the 'fine print' and discern international transactions even where they

are unreported or based on 'conduct' of the transacting parties. However, in the Amadeus Ruling , by affirming the decision of Tax Tribunal, the High Court has made it clear that the plain language of 'erstwhile law' does not leave any room for purposive interpretation based on intent or policy of the Indian Tax Code. The language is amply clear that TPO can determine arm's length nature of only those international transactions that have been specifically referred to him by the Assessing Officer. Accordingly, based on the facts of the case, the arm’s length return for ‘marketing intangibles’ could not be determined by TPO since the said transaction was never specifically referred to him by the Assessing Officer.

The Finance Act, 2011 has amended Indian Transfer Pricing regulations to enable TPO to scrutinize even those international transactions that were not specifically referred by the Assessing Officer (amendment is applicable from June 1, 2011). In the same case of Amadeus India, the Delhi High Court has also taken note of the said amendment and held that the amendment is of 'substantive' nature since it broadens the jurisdiction of TPO enabling him to suo-moto scrutinize international transactions not 'referred' by the Assessing Officer. Since the amendment is 'substantive' and not 'procedural' in nature, it would not apply retrospectively but only with effect from June 1, 2011.

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Amendment by Finance Act, 2011

Amicus Tax Team

Contents of this newsletter are copyright of Amicus. The information contained in this newsletter is solely intended to provide general guidance on matters of interest. Nothing herein constitutes professional or actionable advice, nor does any information herein constitute a comprehensive or complete statement of the issues discussed. If you desire, you may kindly contact us to confirm your understanding and seek professional advice. The High Court also relied on a recent decision of Gujarat High Court in the case of M/s Veer Gems v. ACIT (Special Civil Application no. 12648 of 2011) The Finance Act, 2011 inserted section 92CA(2A) which states: “Where any other international transaction [other than an international transaction referred under sub-section (1)], comes to the notice of the Transfer Pricing Officer during the course of the proceedings before him, the provisions of this Chapter shall apply as if such other international transaction is an international transaction referred to him under sub-section (1)”

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