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The Finance Bill, 2001 introduced Transfer Pricing Regulations by amending the
provisions of section 92 of The Income Tax Act, 1961. The reason for introducing the
Transfer Pricing legislation has been explained by the Memorandum explaining the
provisions of Finance Bill, 2001 introduced by the Finance Minister.
With a view to provide statutory framework which can lead to computation of fair,
reasonable and equitable tax and profits in India new provisions were introduced in the
Income Tax Act with effect from financial year 2001-2002 i.e. Assessment year 2002-
2003. These provisions relate to the computation of income from international
transactions having regard to arm’s length price, keeping and maintaining of information
and documents by persons entering into international transactions, furnishing of report
from an accountant by persons entering into such transactions and definitions of certain
expressions occurring in the said sections”.
Section 92 as it existed till 31st March, 2001 provided that if in the opinion of the
assessing officer if the transaction between resident and non resident is so arranged that
produces no profit or less profits than otherwise it might produce owing to the close
connection, the assessing officer has the power to determine the profits that may have
been reasonably derived.
Rule 10 of the Income Tax Rules, 1962 as it existed till 31st March, 2001 provided that in
determination of income to non resident in respect of any transaction that has arisen to
non resident due to connection between the resident and non – resident. The assessing
officer may calculate the profits on the following basis :
Several judicial decisions also supported the above arbitrary powers of the assessing
officer.
In the case of CIT vs Mewar Textiles Mills Lts. (70 ITR 458) it was decided by the court
that it will not interfere if the assessing officer has made a fair estimate.
Further in the case of Blue Star Engg. Co. (P) Ltd. V. CIT (73 ITR 283) (Bom) it was
decided that even if the estimate is based on guesswork, court might not interfere if
assessee has not placed material before justifying a more definite and certain
apportionment.
Section 92