TMI Blog2016 (11) TMI 1008X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel 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 legislation. That aspect of the matter is academic as on now, because, even if we are to hold that it does restrict or regulate the domestic law provisions on transfer pricing, the application of arm’s length standard cannot be declined because it is a case of juridical double taxation and not economic double taxation. However, as we deal with this interplay between article 9 and transfer pricing legislation, it is important to bear in mind the fact that there is a school of thought that a domestic 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. - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4] While the assessee did not raise any dispute with respect to mechanics and quantification of the ALP adjustments, and that s the reasons the facts relating to those aspects of the matter are not being set out here, the assessee did oppose theses ALP adjustments on the ground that by making these ALP adjustments, the Assessing Officer is eroding the Indian tax base. It was contended that the impugned ALP adjustments result in Indian tax base erosion, and are, therefore, contrary to the scheme of Section 92(3) read with circular no. 14 of 2001. This plea was explained, inter alia , as follows: The Appellant submitted before 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 fees would have been allowed or deducted in the hands of the payer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision in the case of Instrumentarium Limited (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 the assessee, however, at best is that the assessee is covered by the exclusion clause set out in section 92(3) which lays down the situation in which the provision of computation of income having regard to the arm's length price, as set out in section 92(1), will not apply. [Para 15] Section 92(3), to the extent relevant for present analysis, provides that the provisions of this section shall not apply in a case where the computation of income under sub-section (1) has the effect of reducing 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 respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puted on the basis of entries made in the books of accounts in respect of previous year in which the international transaction was entered into. There is thus no scope at all for taking into account the impact on taxes for the subsequent years. The tax shield available to the assessee's AE, as a result of accumulated losses- even if any, can only affect the income of the subsequent years, which, for the reasons noted above, are not relevant for the purpose 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 deduction in the hands of the corresponding Indian AE. There is no base erosion by the ALP adjustments in the hands of income of the non-resident company in respect of transactions with the Indian AEs. The base erosion could have, if at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 this transaction structure by way of interest free loan to Indian AE, the transaction would not have been structured in this manner; after all the underlying motive in the activities of the assessee is to maximise gains for its shareholder rather than broaden the tax base of Indian revenue. Of course, even this tax shield of accumulated losses is wholly academic inasmuch as the deduction has not been claimed, nor can it be claimed at this stage. [Para 21] The Indian transfer pricing regulations 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, direction or instruction to the field authorities to the effect that section 92 is not to be applied when overall tax incidence in India, in respect of the parties involved in the international transaction, will decrease. Section 119 (1), which makes CBDT circulars binding on the field 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 situations, as envisaged in section 119(2), in which the CBDT circulars can relax the rigour of law but it is not even the case of the assessee, and rightly so, that the provisions of section 92 can be relaxed under section 119(2). The Board's understanding about the intent of Legislature, does not in any way fetter the field authorities. [Para 27] Having said that, the role of 'intent of legislature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 assessee. Therefore, this plea is rejected. [Para 33] [7] Learned counsel, however, has more armoury in store. He seeks the treaty protection for the first time at this stage, and contends that, in view of the treaty protection available to the assessee, the impugned ALP adjustments cannot be made in the hands of the assessee. It is pointed out that there is no dispute about the assessee being a tax resident of the Netherlands, and, accordingly, being entitled to the protection of India Netherlands 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terfere in the matter. In his brief rejoinder, learned counsel for the assessee reiterates his submissions [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, we reject the same. Before we move on to the arguments on merits, which essentially centre around interpretation of article 9 of Indo Dutch tax treaty, we consider it appropriate to set out the relevant article as follows: ARTICLE 9- ASSOCIATED ENTERPRISE (1) Where: a. an enterprise of one of the States participates directly or indirectly in the management, control or capital of an enterprise of the other State; or b. the same persons participate directly or indirectly in the management, control or capital of an enterprise of one of the States, and an enterprise o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in economic double taxation since subsidiaries and the parent companies are distinct entities. However, this article leaned upon the arm s length standards as a measure to address this malady, and, of course, the remedy being conceptual, the remedy was far sighted and much more comprehensive which could stand the test of time for long long time to come even in situations not envisaged at that point of time. It is not relevant today as to what was the malady sought to be addressed by the introduction of article 9 at that point of time, which may 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 conditions precedent in article 9 are attracted, the application of arm s length standards certainly comes into play. While it is true that the examples ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 section 9(1) in the present case, the application of article 9(1) cannot be declined solely on that ground. In the case of taxation of FTS, which are taxed in both the treaty partner countries, an element of double taxation in inherent in the scheme of the treaties, and its taxation in the source country is not dependent on the relief granted by the residence state. As a corollary to this fundamental position, the taxability of higher quantum of FTS in the source state cannot be negated on the 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 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contrary to the sense and purpose of a double taxation avoidance agreement to prohibit this kind of adjustments of income as may be necessary. It is also useful to bear in mind the fact that article 9, in a way, was precursor to the present transfer pricing regime globally, even though this article also constitutes enabling provision for ALP adjustment under the domestic transfer pricing regulations. When we look at the historical developments with respect to development of article 9(1), we find it has been a long journey from its primitive applications in the PE situations, which invariably included subsidiaries at that point of time, to its equally valid application in the context of modern day complex business models. On the first principles, therefore, the transfer pricing legislation cannot be rendered ineffective on the basis of the limitations in the provisions of Article 9. This principle is statutorily recognized in tax legislation in many jurisdictions, including in the fatherland of Dr Vogel himself- on whose commentary so much reliance has been placed by the learned counsel. Of course, a clear indication to that effect in Section 90 would certainly have helped clarifyin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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