Limited scrutiny by tax department could result in a detailed transfer pricing investigation

Synopsis:

This could mean that if a tax official suspects that certain transactions need further scrutiny it could refer them to a separate department such as transfer pricing. This was ruled by a high court following a writ petition filed by Transsys Solutions.


In what could be a significant tax implication for several companies, the tax department can convert a limited scrutiny exercise into a detailed investigation if the tax official has followed proper procedure, as per a recent tax ruling.

This could mean that if a tax official suspects that certain transactions need further scrutiny it could refer them to a separate department such as transfer pricing. This was ruled by a high court following a writ petition filed by Transsys Solutions.  ..
As per the details of the case the tax department had picked up the company for limited scrutiny. Limited scrutiny is essentially a computer aided scrutiny that only looks at one aspect or limited aspects related to taxation in the company. In Transsys Solutions’ case the tax department wanted to verify whether the value of certain international transactions was as per the regulations.

However, the tax officer—an assistant commissioner of income tax—sought approval to refer the case to the transfer pricing department.

The software company filed a writ petition in the high court. The company said that assessment was only for “limited” basis and objected to the case being referred to transfer pricing.

The HC ruled that the tax officer should only have a “prima facia” belief that there was a need for reference to TPO (transfer pricing officer) since it was a preliminary stage that did not required detailed enquiry about correctness of arms’ length pricing. The court also clarified that prior approval of PCIT or Commissioner is required by AO prior to making reference to TPO. HC also highlighted that it is must for tax official to explicitly mention the issue on which reference was thought to be necessary.