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K.R. Srivats

NEW DELHI, May 1

CHARTERED Accountants are not required to ensure that the method used by an assessee for determining the arm's length price is the most appropriate method. They are also not required to suggest the most appropriate method for determining the arm's length price of an international transaction.

This guidance has now been given by the Institute of Chartered Accountants of India (ICAI) in its Guidance Note on report on international transactions under Section 92E of the Income-Tax Act, 1961 (transfer pricing).

This position of the ICAI would imply that a chartered accountant is only required to ensure that the method stated as being used to determine the arm's length price by the assesses has actually been used.

Stating that the computation of the arm's length price and the selection of the most appropriate method is the responsibility of the assessee, the ICAI Guidance Note held that a chartered accountant only needs to verify the same to ensure that they are in accordance with the accounts and records maintained by the assessee and that the same are true and correct.

The transfer pricing regulations require an assessee to furnish, along with the return of income, a report of an accountant (chartered accountant) expressing an opinion, among other issues, on whether the prescribed documentation on international transactions have been maintained or not.

These regulations stipulate that any income arising from an international transaction should be computed having regard to the arm's length price. The Finance Act 2001 had introduced a new set of transfer pricing provisions to prevent shifting out of profits, especially by multinational companies, by manipulating prices charged or paid in international transactions, thereby eroding the country's tax base.

(The arms' length principle states that in all international transactions, no extraneous conditions such as tax avoidance in the country where the income arises should shape the form of contract covering the transaction which should be put through as though the parties concerned are not connected to each other.

Which in turn would mean, in a lay man's term, ignoring the fact that the transaction is between two subsidiaries and peg the prices of the products at the market rates.)

The Central Board of Direct Taxes (CBDT) rules already provide that the most appropriate method, for determining the arm's length price on a particular international transaction, would have to be chosen from the five specified methods.

These are comparable uncontrolled price method, resale price method, cost plus method, profit split method, transactional net margin method or any other method which may be prescribed by the CBDT. For the present, no additional methods have been prescribed by the CBDT.

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