2008 (6) TMI 228 - AT - Income Tax

Assessee entitled to tax benefits under India-Netherlands DTAA as Tribunal dismisses Revenue's appeal.

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order that the assessee is entitled to the benefits of the India-Netherlands DTAA. The ... Definition of 'tax' in Article 3(d) of the Indo-Netherlands DTAA - default or omission in relation to taxes - transfer pricing provisions (ss. 92 to 92F) and determination of arm's length price - treaty benefit under Article 13(5) (taxation of capital gains) - residency and Tax Residency Certificate (TRC)Definition of 'tax' in Article 3(d) of the Indo-Netherlands DTAA - default or omission in relation to taxes - transfer pricing provisions (ss. 92 to 92F) and determination of arm's length price - treaty benefit under Article 13(5) (taxation of capital gains) - Whether a non-disclosed or non-complied transfer pricing irregularity under ss. 92 to 92F of the Income-tax Act (relating to determination of arm's length price) falls within the exclusion in the DTAA that 'tax' shall not include any amount payable in respect of any default or omission in relation to the taxes to which the convention applies, thereby permitting denial of treaty relief under Article 13(5). - HELD THAT: - The Tribunal held that the exclusion in Article 3(d) applies only to amounts 'payable' under the laws of either Contracting State on account of a default or omission in relation to the taxes to which the convention applies (for example, interest or penalties actually payable because of non-payment or incorrect payment of tax). The conditions in Article 3(d) are cumulative: the amount must be payable under domestic law, must be on account of a default or omission, and that default or omission must relate to the taxes covered by the convention. Provisions of Chapter X (ss. 92 to 92F) concern the methodology for determining income (ALP) in international transactions and do not themselves impose an amount payable (tax, interest or penalty); they are machinery for computation. Consequently, a default or omission limited to non-compliance with ss. 92-92F (such as non-reporting or an ALP dispute) does not, by that fact alone, bring the resulting tax within the Article 3(d) exclusion. The Tribunal relied on its earlier reasoning in ABN Amro Bank NV where Article 3(d) was interpreted to exclude interest or penalties payable for defaults (such as TDS defaults) but not to convert regular tax into a non-treaty item merely because procedural or reporting defaults were alleged. Applying this principle, the Tribunal concluded that the Revenue could not deny the Article 13(5) benefit where the assessee produced a TRC and the default alleged related to transfer pricing reporting/determination rather than an amount expressly payable as a consequence of a tax default covered by Article 3(d). [Paras 12, 13, 14, 15]Default or omission under ss. 92-92F (relating to ALP determination and reporting) is not covered by the Article 3(d) exclusion; therefore the assessee is entitled to treaty protection under Article 13(5) on production of TRC.Final Conclusion: The Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s grant of DTAA relief: the Article 3(d) exclusion does not extend to defaults or omissions confined to the transfer pricing machinery provisions (ss. 92-92F), and accordingly the capital gain was held exempt in India under Article 13(5) on production of the TRC. Issues Involved:1. Interpretation of the term 'tax' under Article 3 of the India-Netherlands DTAA.2. Compliance with transfer pricing regulations.3. Applicability of DTAA benefits to the assessee.4. Determination of arm's length price (ALP) for the purchase of shares.5. Set-off of short-term capital gain against long-term capital loss.Detailed Analysis:1. Interpretation of the term 'tax' under Article 3 of the India-Netherlands DTAA:The Revenue contended that the term 'tax' under Article 3(d) of the DTAA excludes any amount payable in respect of omission or default. The AO argued that the benefit of the DTAA should not be extended to the assessee due to defaults committed in transfer pricing regulations. The Tribunal, however, interpreted Article 3(d) to mean that the term 'tax' excludes amounts payable due to defaults or omissions related to taxes but does not extend to procedural defaults related to the determination of total income, including ALP under Chapter X of the IT Act. The Tribunal upheld the CIT(A)'s order, stating that the default or omission mentioned in Article 3(d) does not cover defaults related to the provisions of ss. 92 to 92F of the Act.2. Compliance with transfer pricing regulations:The AO noted that the assessee did not comply with transfer pricing regulations by not disclosing the purchase transactions of shares from associated enterprises in Form No. 3CEB. The AO determined that the purchase price was not at arm's length, leading to a higher net profit. The Tribunal, however, found that the assessee had disclosed the purchase information to the TPO and that the default or omission related to transfer pricing provisions does not fall within the scope of Article 3(d) of the DTAA.3. Applicability of DTAA benefits to the assessee:The AO denied the DTAA benefits, arguing that the assessee committed defaults by not disclosing relevant information and not determining the ALP for the purchase transactions. The CIT(A) disagreed, stating that the assessee is entitled to claim DTAA benefits even if the claim was made subsequent to filing the return, provided the TRC was submitted. The Tribunal upheld the CIT(A)'s view, emphasizing that the DTAA benefits can only be denied for amounts payable due to defaults or omissions related to taxes, not procedural defaults.4. Determination of arm's length price (ALP) for the purchase of shares:The AO replaced the purchase price of shares with the market price of Rs. 73 per share, as determined by the Bombay Stock Exchange, instead of the Rs. 113 per share paid by the assessee. The CIT(A) upheld the AO's determination of the short-term capital gain but allowed the DTAA benefits. The Tribunal agreed with the CIT(A) that the procedural default in determining ALP does not preclude the assessee from claiming DTAA benefits.5. Set-off of short-term capital gain against long-term capital loss:The AO questioned the set-off of short-term capital gain against long-term capital loss, but the assessee contended that such set-off is allowable under s. 70 of the Act. The Tribunal did not specifically address this issue in detail, as the primary focus was on the applicability of DTAA benefits and the interpretation of Article 3(d).Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order that the assessee is entitled to the benefits of the India-Netherlands DTAA. The Tribunal clarified that the term 'tax' under Article 3(d) does not include amounts payable due to procedural defaults related to transfer pricing regulations. Consequently, the assessee's capital gain computed by the AO would be exempt from tax in India under the DTAA provisions.