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2016 (11) TMI 1008 - ITAT AHMEDABAD

2016 (11) TMI 1008 - ITAT AHMEDABAD - TMI - ALP adjustments non permissibility under Article 9 of the Indo Dutch Tax treaty - Held that:- While the relief in the cases of economic double taxation due to application of armís length standards under article 9(1) is available under article 9(2), no such relief is available, under article 9(2), in respect of the juridical double taxation caused by the application of armís length standards. That does not, however, matter. - The non availability o .....

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nly economic double taxation can be remedied by the scope of article 9, as learned counsel urges us to infer, does not exist. In view of these discussions, as also bearing in mind entirety of the case, we see no merits in this new plea raised by the assessee. - Given our above findings, it is not even necessary to take the judicial call on whether or not article 9 of the Indo Dutch tax treaty, or, for that purpose, OECD Model Convention, restricts or regulates the domestic transfer pricing .....

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tic armís length principle, which is what transfer pricing legislation represents, goes much beyond a tax treatyís normal rule making scope since this armís length principle governs taxation of an enterprise in general and the tax treaties do not restrict domestic law in this respect. - Decided against assessee - I.T.A. Nos.: 2933/Ahd/2011, 2841/Ahd/2012, 486/Ahd/14 and 273/Ahd/2015 - Dated:- 17-11-2016 - Pramod Kumar AM and S S Godara JM For The Appellant : Rahul Mitra and Prashant Maheshwari F .....

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tic TP law. This issue, which is common in all the appeals, is one of the facets, in addition to the erosion aspect, of assessee s grievance with respect to arm s length price adjustment, in the income from fees from technical services (FTS) received from its associated enterprise in India. These adjustments are as follows: Assessment year ALP adjustment (Rs) 2007-08 8,53,03,582 2008-09 29,43,61,998 2009-10 28,13,51,356 2010-11 33,93,20,979 Total 100,03,37,915 [3] The background in which the iss .....

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r article 12 of India Netherlands Double Taxation Avoidance Agreement. The income so earned by the assesse, from rendition of technical services to Indian AEs, was subjected to arm s length price adjustments under the transfer pricing regulations, to the tune of ₹ 100.03 crores, as detailed in the preceding paragraph and spread over these four assessment years. [4] While the assessee did not raise any dispute with respect to mechanics and quantification of the ALP adjustments, and that s t .....

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re the DRP that application of arm s length principles for making TP adjustments under the aforesaid circumstances was not proper; and also against the principles and spirit of the TP provisions of India, since had the Appellant charged additional fees from its Indian AEs, namely HLPL and HPPL in order to comply with arm s length standards, then the said additional fees would have been taxed in India in the hands of the Appellant @ 10% on gross basis, while at the same time, the said additional .....

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s of TP are meant to be applied for the reverse scenario, namely to check or protect the erosion of the tax base of the country. [5] Grievance of the assessee was rejected by the Dispute Resolution Panel. The assessee is aggrieved and is in appeal before us. [6] In the meantime, however, a special bench of this Tribunal, consisting of three members- including one of us, heard and adjudicated upon a similar issue relating to the theory or concept of base erosion in the case of Instrumentarium Cor .....

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by the special bench decision and that he has nothing to add so far as the arguments on the base erosion issue, which have already been heard and adjudicated upon by the special bench, are concerned. He, however, added that while special bench decision does bind this division bench of the Tribunal, and that is the reason he is not arguing on that aspect of the matter any further, he has legal submissions to make on the correctness of the special bench decision which he will make, if so necessar .....

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ted (supra). The findings of the Tribunal, in this case, can be summarized as follows: Section 92(1) requires that any income arising from an international transaction shall be computed having regard to the arm's length price. To this extent, there is no dispute that the transactions are international transactions between the associated enterprises, and the income arising from these transactions is, therefore, required to be computed having regard to the arm's length price. The case of t .....

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the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into. [Para 16] In plain words, what this sub section holds is that where as a result of computation of income under section 92(1) on the basis of arm's length principle, either the income of the assessee is reduced or loss of the assessee is increased, the provisions of secti .....

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7; 100 and not at ₹ 90. Adopting the arm's length price in such a situation will result in a situation in which, the computation of arm's length price will have the effect of lowering the profits or increasing the losses. Essentially, therefore, it refers to the computation of income in the hands of the assessee in respect of which computation of income is being done under section 92(1). [Para 17] In substance, fundamental contention of the assessee, however, is that a holistic vie .....

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s reducing the tax liability on income or increasing the tax shield for the losses. In effect, thus, not only the actual tax impact but also the possible tax advantage, de hors the time value of money, should be taken into account. This interpretation, according to the assessee, will advance the intent of the Legislature and objectives of the transfer pricing. [Para 18] A plain reading of section 92(3), however, indicates that what is to be seen is impact on profits or losses for the year in con .....

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of section 92(3). The manner in which the argument of the assessee is placed, a part of the section is being interpreted in isolation without appreciating the impact of the other part of the same section. Such an approach is clearly not permissible. This legal position apart, the arguments of the assessee also proceed on the fallacious logic inasmuch as the amount by which income of the assessee is increased by the arm's length price adjustments, under the Indian law, is not available for d .....

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P adjustment will not be available to the Indian AE because there is no provision enabling deduction for ALP adjustments. Second proviso to section 92C(4) also constitutes a bar against lowering income of the non-resident AE, as a result of lowering the deduction in the hands of the Indian AE, rather than enabling a higher deduction in the hands of the Indian AE as a result of increasing non-resident AE's income.[Para 19] It must also be taken note of the fact that as far as the relevant yea .....

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es. By not making the impugned ALP adjustments, the tax administration is certain to have its tax base eroded by 10 per cent of the arm's length interest. To what extent, this tax revenue will could have been offset by the increase of loss of the Indian AE is wholly academic because there is no way one can ascertain, at least at the assessment stage, as to whether this loss will be actually set off against the future profits of the Indian AE. [Para 20] The case of the assessee is that the ap .....

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, therefore, can at the most be conservative, but certainly not myopic. In any case, that is what the law provides.The law has to be interpreted as it exists and not as it ought to be. The lawmakers may have preferred a bird in the hand over two in the bush but that is a policy issue. In any event, nothing in the world can match the exactitude of hindsight but the trouble is that it inherently comes a bit too late. If the assessee was to be so certain of the tax benefit to the Indian revenue by .....

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do not give any discretions to the tax administration for the application of arm's length price in computation of profits arising from international transactions. As there is no discretion with the tax administration, there is no occasion for any guiding principles in the use of discretion. So far as the Indian transfer pricing provisions are concerned, the use of arm's length price, in computation of income arising from international transactions between the AEs, is mandatory. The only .....

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ian Income-tax Act, 1922. It is sufficient to take note of the fact that the situation in the Australian law, so far as this aspect of the matter is concerned, is materially different. When the relevant legal provisions are not in pari materia, the clarifications issued by the Austrailian Tax Officer(ATO) are not even relevant. Of course, even when the provisions were to be in pari materia, nothing really turns on these clarifications issued by the ATO. At best, the approach adopted in these cla .....

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the same or similar circumstances. The basic intention underlying the new transfer pricing regulations is to prevent shifting out of profits by manipulating prices charged or paid in international transactions, thereby eroding the country's tax base. The new section 92 is, therefore, not intended to be applied in cases where the adoption of the arm's length price determined under the regulations would result in a decrease in the overall tax incidence in India in respect of the parties i .....

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eld authorities, lays down that the CBDT may, from time to time, issue such orders, instructions and directions to other income-tax authorities as it may deem fit for the proper administration of this Act, and such authorities and all other persons employed in the execution of this Act shall observe and follow such orders, instructions and directions of the Board. What follows is that it is only the order, instruction or direction of the CBDT which binds the field authorities. There are certain .....

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e which are being sought to be interpreted. That is not the case here. If intention of the law is not implemented by the plain words of the statute, and unless there is an ambiguity requiring some violence with the words, such an intention, no matter how noble it is, is of no relevance in the judicial interpretation. [Para 28] Thus, even if it is indeed intent of the Legislature that transfer pricing provisions are not to be invoked in the cases where there is lowering of the overall profits of .....

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ts, against the losses incurred by the AE, cannot be taken into account into such a computation about overall tax impact, nor time value of money can be ignored in these computations. The vague generalities and uncertain contingencies also have no role in the computations of overall tax impact of structuring of a transaction. In this view of the matter, even if it is accepted that the transfer pricing provisions are not to be invoked when overall profitability is reduced by the way in which the .....

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lings with the Indian AE are not furnished by the assessee, and had to be collected by the Assessing Officer from the secondary sources, it is difficult to have faith in these wholly unsubstantiated claims of the assessee; there is no material to support these claims either. [Para 29] Thus, bearing in mind entirety of the case, the base erosion argument cannot be accepted, in principle, nor is there anything in the facts on record to even support the factual elements embedded in the plea of the .....

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nds Double Taxation Avoidance Agreement [Indo-Dutch tax treaty, in short; 177 ITR (St) 72]. His basic argument is that Article 9 of the Indo Dutch tax treaty does not permit ALP adjustments except in the case of juridical double taxation and only in the hands of a domestic enterprise, and, as provisions of the tax treaties override the provisions of the Indian Income Tax Act, except to the extent these provisions are more beneficial to the assessee, no ALP adjustment can be made in the hands of .....

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ain reading of the above treaty provisions. His contention that his view is supported by OECD Commentary, which has been held to be in the nature of contempranea expositio, and the views of a German scholar, late Prof Klaus Vogel. His argument is based on the theory that while article 23 provides relief from juridical double taxation, by granting exemption to income taxed in the other jurisdiction, the role of article 9 is to provide relief from economic double taxation. His emphasis is that, as .....

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sentative opposes the stand of the assessee and submits that such an issue cannot be raised for the first time before the Tribunal. It is pointed out that as the assessee has not been able to show any fault in the stand of the authorities below, and has accepted that the same is now upheld by the Special bench decision in the case of Instrumentarium Limited (supra)- wherein the assessee was also one of the interveners, the appeals should be dismissed summarily. Without prejudice to this stand, o .....

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ns [8] So far as admission of the additional plea at this stage is concerned, we find that, in view of Hon ble Supreme Court s judgment in the case of NTPC Ltd vs CIT [(1998) 229 ITR 383 (SC)] and bearing in mind the fact that this is purely a legal issue, it is required to be admitted for adjudication on merits. Having admitted this legal plea for adjudication, and for the reasons we will set out in a short while, we find it entirely devoid of any legally sustainable merits, and, accordingly, w .....

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or capital of an enterprise of one of the States, and an enterprise of the other State, and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed ac .....

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adjustment to the amount of the tax charged therein on those profits. In determining such adjustment, due regard shall be had to the other provisions of this Convention and the competent authorities of the States shall if necessary consult each other. [9] Coming to the merits of learned counsel s arguments, the underlying proposition, on which entire foundation of learned counsel s complex web of reasoning rests, is that it is only economic double taxation which can be addressed by article 9. Wh .....

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incided with the affiliated companies , which were as a norm under League of Nations first draft convention in 1927 treated as permanent establishment , being taken out of the definition of the permanent establishment . The emphasis, therefore, could indeed have been to check the underreporting of profits in the source jurisdiction by these affiliated companies, and, as such, any aggressive application of this principle could only have resulted in economic double taxation since subsidiaries and .....

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have only been economic double taxation, but what is relevant is whether the article 9 is worded wide enough to cover the contemporary transfer pricing legislation dealing with situations of economic as also juridical double taxation. As to the latter, in our humble understanding, there is no bar in the article 9 to leave out the cases of juridical double taxation. The distinction between economic double taxation and juridical double taxation does not find place there at all. As long as the cond .....

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h would be made between independent enterprises , the addition profits by applying arm s length standards (i.e. any profits which would, but for those conditions, have accrued to one of the enterprises, but by reason of those conditions, have not so accrued) may be included in the profits of that enterprise and taxed accordingly. There is no, and there cannot be any, dispute about the fact that these conditions are satisfied on the facts of the present case, as indeed in every case covered by th .....

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x treaties restrict application of domestic law of taxation rather than create independent rights of taxation. Article 9(1) is thus, in a way, an enabling provision, and the TP mechanism under the domestic law is the machinery provision. The provisions of article 9(1) permit ALP adjustment in all situations in which the arm s length standards require higher profits in the hands of any one of the enterprises, but by reason of those conditions, have not so accrued to be included in the profits of .....

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strative and not exhaustive. The fact that arms length standards were introduced by way of article 9 to tackle certain types of economic double taxation, even if that be so, does not fetter the application of these arms length standards, in all dealings between the associated enterprises- as is unambiguous the scheme of article 9, including the cases resulting in juridical double taxation. As for the point that article 9(2) does not provide corresponding relief for the ALP adjustments made under .....

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ground that no relief against such taxation is granted by the residence state. All the examples given by the assessee simply demonstrate as to how while the relief in the cases of economic double taxation due to application of arm s length standards under article 9(1) is available under article 9(2), no such relief is available, under article 9(2), in respect of the juridical double taxation caused by the application of arm s length standards. That does not, however, matter. The non availability .....

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only economic double taxation can be remedied by the scope of article 9, as learned counsel urges us to infer, does not exist. In view of these discussions, as also bearing in mind entirety of the case, we see no merits in this new plea raised by the assessee. [10] Given our above findings, it is not even necessary to take the judicial call on whether or not article 9 of the Indo Dutch tax treaty, or, for that purpose, OECD Model Convention, restricts or regulates the domestic transfer pricing .....

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tic arm s length principle, which is what transfer pricing legislation represents, goes much beyond a tax treaty s normal rule making scope since this arm s length principle governs taxation of an enterprise in general and the tax treaties do not restrict domestic law in this respect. The profit adjustment mechanism, envisaged in tax treaties, do not deal with supra national income determination, and, therefore, the provisions of tax treaties cannot be seen as restricting, or overriding, domesti .....

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