TaxTMI 
TaxTMI 
2016 (11) TMI 1008
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....ceived 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 issue before us arises is as follows. The assessee before us is a company incorporated in, and tax resident of, the Netherlands. During the relevant previous years, the assessee had rendered certain technical services to its associated enterprises in India, i.e. Hazira LNG Port Limited and Hazira Port Private Limited. The consideration received by the assessee for rendering these services, which was subject to tax @ 10% on gross basis in the hands of the assessee as fees for technical services under 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 Rs. 100.03 crores, as detailed in the preceding paragraph and spread over these four assessment years. [4] While the assessee did....
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....y of base erosion and as argued by the assessee, was rejected. When these appeals came up for hearing before us, learned counsel fairly accepted that the base erosion issue is now stands covered against the assessee 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 necessary, before Hon'ble Courts above. As for this issue, (i.e. whether invoking transfer pricing provisions in case of an income in the hands of a non-resident enterprise, when it is tax deductible in the hands of an assessee in India and even when such an assessee is incurring losses, cannot be invoked as the same would amount to base erosion of tax base in India), as learned counsel fairly agrees, the issue is covered against the assessee by Special Bench decision in the case of Instr....
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....ion of income is being done under section 92(1). [Para 17] • In substance, fundamental contention of the assessee, however, is that a holistic view of the matter should be taken and the concept of lowering overall profits and increasing overall losses should be adopted not only for the assessee alone, but of all the related AEs as a whole- as taxable in India. Going a step further, what is implicit in the argument of the assessee is that the figures of income or losses should not be looked at, but on tax impact of such profits or losses. In effect thus, reducing the income chargeable to tax or increasing the loss should be de facto read as 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 consideration itself as it is....
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....axability of the Indian AE because admittedly the related Indian AE was incurring the loses. 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 approach adopted above is myopic because such an approach overlooks the tax shield available to the Indian AE in the form of accumulated losses. However, tax administration cannot be expected to have clairvoyance of whether or not Indian AE will actually make sufficient profits in the next eight assessment years which will subsume the losses incurred by the assessee by the AE. The benefit of tax shield, even if any, is, therefore, wholly hypothetical. The approach adopted by the tax administration, therefore, can at the most be conservative, but certainly not myopic. In any case, that is wha....
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.... the approach adopted in these clarifications could be taken as arguments in support of the assessee. [Para 25] • When transfer pricing provisions were introduced on the statute, the CBDT vide circular dated 14 of 2001, inter alia stated that newly substituted section 92 is intended to ensure that profits taxable in India are not understated (or losses are not overstated) by declaring lower receipts or higher outgoings than those which would have been declared by persons entering into similar transactions with unrelated parties in 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 involved in the international transaction. [Para 26] • What the circular states is the intent of the Legislature and the fact that it is in....
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....ainst 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 impugned international transaction is structured by the assessee, it will have no impact on the present fact situation as a limited period entitlement, for set off of loss against future profits, cannot be adjusted against the profits which have escaped taxation, for the purpose of these computations of overall impact. The benefit of loss is not real; it is contingent upon an uncertain event i.e. profits being made so as to subsume these losses. When even basic facts about the assessee's dealings 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 ....
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....iting of the profits of the assessee so as to truly capture the profits arising to the assessee in the source jurisdiction. The corresponding adjustment, envisaged by article 9(2), relives the economic double taxation caused by adjustments due to such rewriting of profits. It is on this basis that the learned counsel urges us to hold that the impugned ALP adjustments cannot be made. Learned Departmental Representative 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, on merits of the plea now raised by the assessee, he submits that once the assessee himself accepts that the wordings of Article 9 donot support his case, there is no occasion to refer to any commentary or scholarly analysis to find out the alleged scheme of the treaty which is not eviden....
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....is 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. While on this aspect of the matter, it is useful to take note of the fact that juridical double taxation refers to a situation in which the same person gets taxed in respect of the same income in more than one tax jurisdiction. Economic double taxation, on the other hand, refers to the situation in which the same income, though in different hands, gets taxed in more than one jurisdiction. The point of time when article 9 first saw light of the day, i.e. in the first half of the last century, it coincided 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 affil....
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....'s length standards are to be applied is something which has not been defined by the treaties and the mechanism provided under the domestic law, therefore, must hold good. Article 9(1) does not, and cannot, provide the basis of the ALP adjustments as tax 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 that enterprise and taxed accordingly". The provisions are clear and unambiguous. There is no occasion to read this provision as confined to enabling ALP adjustment in respect of only domestic entities. The mere fact that examples given by the analysis of article 9(1), whether in the OECD Commentary or in scholarly analysis, are confined to economic double taxation situations does not imply that the article 9(1) cannot be applied to other s....
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....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. 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, domestic law mechanism on this aspect. There i....