TMI Blog2004 (11) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... nt company, a tax resident of Finland (for short 'Instrumentarium) which has not been assessed under the Income-tax Act, 1961 (for short the "Act") in India . Instrumentarium is engaged in the business, inter alia, of manufacturing and selling of medical equipments. Datex operates as 'distributor' of the Instrumentarium in Indian market. On August 26, 2002 , Instrumentarium and Datex entered into a loan agreement under which Instrumentarium granted a loan in US dollar equivalent to Indian Rs.360 million for the purpose of general business of Datex. The loan is said to be free of interest. Datex has filed copies of the loan agreement with the Reserve Bank of India to comply its requirement. The convention between the Republic of India and the Republic of Finland for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital was concluded on 10 th June, 1983 , notified on 20 th November, 1984 and subsequently amended by notification dated 13 th August, 1998 (referred to in this ruling as the "Treaty"). Instrumentarium filed this application under section 245Q(1) of the Act seeking advance ruling of the Authority on the following questions: • Whether the grantin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in exercise of the powers conferred upon it by section 90(1) of the Income-tax Act, 1961 (hereinafter referred to as the "Act"), the applicant, being a company incorporated in Finland and accordingly both a national as well as a tax resident of Finland, is not subject to the rigours of the transfer pricing legislation of India contained in section 92 to 92F of the Act, with respect to the transaction of interest free loan equivalent to Rs.360 million granted by it in favour of its wholly owned subsidiary company incorporated in India, namely, Datex-Ohmeda (India) Private Limited (hereinafter referred to as "Datex), and accordingly is not required to charge any arm's length price of interest on such loan? • Whether, since any company, which is incorporated under the laws of India and is also a national and a tax resident of India, is not mandatorily required to charge any interest on loans given to its related parties e.g. subsidiary companies, situated in India, inasmuch as, the Act is not empowered, in absence of any transfer pricing legislation relating to an element of income with respect to transaction between two entities, both of which are tax residents of India, to impose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e quantum of interest, which should be paid by Datex to Instrumentarium having regard to the international market. It will also examine the question as to whether not charging of interest on the loan is a convenient strategy crafted by the non-resident company as part of its global strategy to avoid incidence of tax in the other contracting state where the subsidiary company is located i.e. India and the present application is an attempt to preempt any such exercise by the assessing officer and, therefore, it should be rejected. The Parliament in its wisdom did not intend that issues arising from or related to an international transaction should not go through the entire gamut of the provisions of section 92 to 92F and there should be a prior determination by the Authority which is not a tax enforcing authority. In regard to the additional questions, it is stated that the term 'national' is defined under article 3(1)(d) of the Treaty. The definition shows that article 24 of the Treaty can be invoked by any individual, legal person, partnership and association. Companies are not included within the definition of "national". Therefore, the Instrumentarium is not entitled to the prote ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of interest at arm's length rate by the applicant on the loan of Rs. 3.60 million granted to Datex would lead to frustrating the legislative intent in enacting the provisions of transfer pricing, as the same would actually result in erosion of tax revenue of the country, therefore, it is not intended to apply in cases where the adoption of arm's length price determined under the Act would result in a decrease in the overall tax incidence in India in respect of the parties involved in the international transaction. In Circular No. 14 of 2001 issued by the CBDT which is binding on the Income Tax Departments, it is clearly stated that the legislation relating to transfer pricing is not intended to be applied in cases where the adoption of arm's length price determination under the Act would result in a decrease in the overall tax incidence in India in respect of the parties involved in the international transaction. On the other hand, if no interest is paid by Datex to the applicant, as it is conceived of in the instant case, the Government exchequer is actually benefited and it is for this reason sub-section (3) of section 92 provides that where the adoption of arm's length price i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder that Section 92(1) be not applied or implemented. The Authority, which is constituted under the Act, has no such power and even a Court exercising Constitutional powers such as under Article 226 would be unable to do so. In substance, the case of the applicant is that as applying the arm's length price to give effect to sub-section (1) of Section 92 in the case of the applicant results in loss to the revenue, the provisions of sub-section(3) ought to be applied and power under Section 92(1) should not be exercised. The contention of the learned Solicitor General is that the applicant is seeking to enforce a premature application of sub-section (3) of section 92 which can be invoked only at the stage of assessment with full facts being placed before the Assessing Officer and that in the guise of interpretation, Section 92 cannot be displaced by seeking advance ruling from the Authority that the principle of arm's length price be not adhered to. It is argued that the authority has no jurisdiction to order "non- adherence" to statutory provisions and that a Court exercising Constitutional powers such as under Article 226 would be unable to do so, therefore, the authority which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause (a) of section 245N - transaction proposed to be undertaken - determination of a question of law or of fact by the Authority has to be much before the stage of assessment/determination by the assessing officer. Indeed in view of section 245S of the Act the ruling of the Authority in respect of an applicant and the transaction is binding on the Commissioner and the income-tax authorities subordinate to him, therefore, the assessing officer has to give effect to the advance ruling in assessment and the other proceedings. It would, therefore, be incorrect to contend that before the assessment by the assessing officer, the question in regard to transfer pricing cannot be determined by the Authority, if otherwise it is open to it so to do. 8. Chapter X of the Act embodies special provisions relating to avoidance of tax. Section 92 which deals with computation of income from international transaction having regard to arm's length price, section 92A which defines "associated enterprise" and section 92B which incorporates "meaning of international transaction" for purposes of sections 92, 92C, 92D, 92E, fall within the said chapter. There is no controversy about the applicant and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or as the case may be, contributed by such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be. The centre of controversy in this case is sub-section (3) of section 92 which enjoins that the provisions of section 92 shall not be applied in a case where the computation of income under sub-section (1) or the determination of the allowance for any expense or interest under that sub-section or the determination of any cost or expense allocated or apportioned, as the case may be, contributed under sub-section (2), 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 respect of the previous year in which the international transaction was entered into. 9. With the expansion of global operations of multi-national companies well equipped in tax planning to minimize tax incidence of various countries in which they operate, there has been a corresponding le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and "international transaction" with reference to which the income is to be computed under the new section 92. ………" After coming into force of the said provisions, CBDT issued circular No. 14 of 2001 on 11 th May, 2001 containing explanatory notes, inter alia, on transfer pricing in para 55.5 which, in so far as they are relevant, read, "The basic intention underlying the new transfer pricing regulation is to prevent shifting out of profits by manipulating prices charged or paid in international transaction, 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 involved in the international transaction". From a plain reading of the material, quoted above, it becomes evident that where the adoption of arm's length price under sub-sections (1) and (2) of section 92 would result in decrease in the overall tax incidence in India in respect of the parties involved in the international transaction, sub-section (3) enjoins that principle of arm's length price sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d (2). W ithout complying with the statutory requirements it will be too presumptuous to assume the said transaction is beneficial for the Revenue and then invoke sub-section(3) of section 92. 12. To consider the applicability of sub-section (3) of section 92, we have perused the loan agreement between the applicant and the Datex dated August 26, 2002 . Clauses 5, 6 and 7 of the agreement are relevant for our purpose. 5. Repayment. The borrower shall repay the principal amount of the loan in a bullet payment of three years maturity calculated from the first day of loan period. On the maturity of the loan the borrower will pay back to the Lender equivalent amount in US dollars of 360,000,000 Rupees (Rupees Three Hundred and sixty million only) at the exchange rate prevalent on the date of repayment of the loan as full discharge of the loan. 6. Interest Rate The loan will be made available by the Lender to the Borrower free of any interest. • Overdue interest. If the payment is delayed default interest of 16% will be charged. Overdue interest is calculated for the period beginning from the maturity date and ending to date the Principal amount is received to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue of the property. It follows that the Authority cannot pronounce any ruling on the applicability of sub-section (3) of section 92 of the Act. 14. In the light of the above discussion, the applicant has no option but to comply with the provisions of the Act including the legislation relating to transfer pricing, namely, sections 92 to 92F of the Act with respect to the said transaction of loan. Whether or not the applicant would charge the interest, as per the principles of the arm's length price, on the said loan advanced to Datex, having regard to its contractual obligation, is a matter for the applicant to consider but for the purposes of the Act the rate of interest will have to be taken as per the principles of arm's length price. 15. No arguments are addressed on the additional questions. 16. In the result we rule on: • question no. 1 that the question does not fall within the meaning of the expression ''advance ruling'' incorporated in sub-clause (i) of clause (a) of Section 245N of the Act. • question no.2, we decline to pronounce any ruling as it is not pressed. • question no. 3 that the applicant is required to comply with the provisions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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