The general impression prevailing among Revenue officials is that this decision of the Special Bench has effectively resolved all the issues being raised by different taxpayers with regard to the legality of the process of determination of ALP, reference to TPO, etc. Is such an impression right?

Briefly stated, the Tribunal held that the AO need not: (i) demonstrate, before invoking the TP provisions, that there was tax avoidance, (ii) demonstrate, before referring a case to the TPO, that circumstances laid down in Section 92C(3) are satisfied, and (iii) record any satisfaction or provide an opportunity of hearing to the assessee before seeking approval of the Commissioner for referring the case to the TPO.

The Tribunal also held that, (i) the Commissioner’s approval was justiciable, (ii) there is no illegality in Instruction No. 3, as held by the Delhi High Court, and (iii) TPO’s order determining the ALP was not binding on the AO.

However, it may be pertinent to note, after amendment to Section 92CA(4) by the Finance Act, 2007, orders of TPO passed on/after June 1, 2007, would be binding on the AO.

With regard to determination of ALP, the Tribunal held, while remanding the matter back to the TPO that (i) initial burden to demonstrate that most appropriate method was selected is on the assessee, it shifts to the Revenue if they seek to determine a different ALP; (ii) the analysis of comparables is to be restricted to current year data, and prior years’ data may be used only if the assessee demonstrates that such data had influence on ALP of transactions; (iii) comparable uncontrolled price (CUP) method can be applied only where uncontrolled transaction is economically and commercially identical to the international transaction — unadjusted industry margins cannot be used.

While so concluding, the Tribunal, following the Delhi High Court decision in the Sony India case, held that a reference to TPO cannot be made mechanically, and that any misuse of such exercise of discretion can be corrected by jud icial review by statutory appellate authorities and ultimately by courts.

Both the Tribunal and the Delhi High Court, it may be noted, have held that the circumstances enumerated in clauses (a) to (d) of Section 92C(3) would restrict the AO, if he were to determine ALP himself, as well as the TPO, where ALP is determined by the TPO.

This conclusion, coupled with the declaration in CBDT Circular 12 of 2001 and finding of the High Court to the effect that acceptance of the ALP declared by the assessee was the rule and its rejection is the exception posited on the factors in Section 92C(3), highlights the significance of the conditions laid down in Section 92C(3). This issue has now been strengthened by the Supreme Court decision in DIT vs Morgan Stanley & Co. Inc (2007 292 ITR 416), wherein the court held that on the basis of material, information or document, if the AO is of the opinion that the price for the international transaction is not the ALP or that the documents are not adequately maintained, or that the data used is not reliable, then the AO may proceed to determine the ALP in relation to the said transaction.

As the Aztec Software case was decided by a Special Bench of five members, it would be binding on all regular Benches until the entire or any part of the decision is reversed by the High Court or till the court in some other case t akes a contrary view.

The following issues are still open and may be contested notwithstanding the Special Bench decision: