Sunday, November 6, 2011

How to handle Income Tax Scrutiny Assessments u/s 143(2) in India

Indian taxes are complicated, equally complicated is appearing for assessments before the assessing officer who is often the Assistant / Deputy / Joint Commissioner of Income Tax.  The primary objective of this article is to provide an insight into income tax assessements under section u/s 143(2), and how best one can handle this.  This article primarily may be suitable for medium sized manufacturing companies with a turnover range of Rs.100 crores to Rs.300 crores.

Along with the 143(2) intimation, an checklist of about 25 information required is sent by the Income Tax Officer.  These informations require various details relating to the company's activities including income, debtors, creditors, loans, assets etc.  As far as possible please take time and reply to all these queries precisely, with full facts and wherever annexure is required to be submitted also make the annexure.  Please ensure that not only the information is full, but also provided on time given or at the maximum one extension of time.

Then a personal hearing is called for by the Officer, would recommend that the person attending the hearing has reasonable knowledge of the business & also knowledge of income tax, so that he can explain all the queries of the officer about the business as well as income & expenses relating to the business.  Here I would suggest that a senior official from the company (maybe Head of Finance) should attend the hearing and explain to the officer about the company and also all the queries regarding financials of the company. 

The major problem with Indian Income Tax Administration is that they do not have any past records of the company like a "Permanent Audit File" so an information which was provided during the previous assessment will be asked again, so would recommend that be prepared for providing copies of all major agreements like Royalty, Third Party Manufacturing Agreement, Head Quarter Services Agreement, Distributor Agreement etc to the assessing officer, even though these agreements were live before the year under scrutiny.  Also please bear in mind that in India the officers change once in 3 to 4 years and there being no exchange of information among the officers the new officer will ask for all the details which were provided by you to the earlier officer also.  In short, for every assessment everything starts fresh.

Another twist to the tale will be Transfer Pricing.  If your company has substantial International Transactions with related parties then the Income tax Officer will transfer the file to the Transfer Pricing Officer for scrutiny of Transfer Pricing transactions.  Again the problem of "disconnect" among the officers happen here.  The Assessing Officer and the Transfer Pricing Officer do not exchange information so the Transfer Pricing Officer will also ask some details which were already provided to the Assessing Officer and also ask for one more copy of the agreements already provided to the Assessing Officer.  The scrutiny of Transfer Pricing Officer will again have its iterations of calling for additional details and personal hearing.  Here again I would strongly recommend that a company representative having reasonable knowledge about business and income tax regulations attend the hearing, so as to make the Transfer Pricing Officer more comfortable.  Here also please provide full details for any queries raised by the Transfer Pricing Officer and ensure that you attend the Personal Hearing and all the subsequent hearings on time stipulated without postponment as much as possible, this will help trust to be built on you by the Officer.

Once the Transfer Pricing Officer sends in the report, the Assessing Officer again opens the files and goes through another round of questions and personal hearing.  As usual be elaborate and complete in your answers and ensure that you attend the Personal Hearings on time stipulated without postponment.

If there are issues raised by the officer which you do not accept please present your side of the case with full details including case law citiations and preferably in writing as you would do to the higher courts.  This helps in decision making of the Assessing Officer.  Here you should take opinion from experts as if the officer rejects your side of the story then appeal is a costly and time consuming affair.

In conclusion, please be prompt & accurate in your replies and ensure that you attend the hearing on time, surely you will get over the assessments without much hurdles.

3 comments:

  1. please give details about how to prepare document in which format and how copy which document to give

    ReplyDelete
  2. please give details about how to prepare document in which format and how copy which document to give

    ReplyDelete
  3. Dear Sir

    Please provide us some examples for how to prepare documents ..

    Thanks & regards

    ReplyDelete