AI Drafter 
TaxTMI 
TaxTMI 
2004 (11) TMI 16
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....ex 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 granting of loan amounting to Rs.360 million by the applicant, being a non-resident corporate assessee, in favour of Datex-Ohmeda (India) Private Limited (hereinafter referred to as "Datex"), which is its wholly owned subsidiary company incorporated in India, without charging any interest, and accordingly without adhering to the principles of arm's length price, actually results in the....
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....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 any income-tax on any notional interest in the hands of the Indian company granting the loan, in view of the provisions of non-discrimination contained in Article 25(1) of the India-Finland Tax Treaty, the applicant is also not required to charge any arm's length price of interest on the loan equivalent to Rs.360 million granted by it in favour of Datex and according....
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....ompany 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 protection on the ground of 'nationality' under article 24 of the Treaty. There is no discrimination in application of transfer pricing provisions to Instrumentarium vis-à-vis any national of India placed in the same circumstances. Transfer pricing provisions are based on the concept of residence and discrimination mentioned in article 24 of the Treaty is based on the conc....
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....ed 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 in relation to an international taxation has the effect of reducing income of an assessee and increasing its loss then the provisions of section 92(1) of the Act which require any income arising from an international transaction to be computed having regard to the arm's length price, would not apply so as to confer a benefit on the assessee. The learned CA on the said p....
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....tion 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 is constituted under the Act, could not exercise such a power. 7. Before adverting to the above contentions, it would be necessary to refer to the provisions of the Act dealing with advance rulings. Section 245N(a) defines "advance ruling" as follows:- [(a) "advance ruling" means - • a determination by the Authority in relation to a trans....
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....g 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 Datex being associated enterprises within the meaning of section 92A and the transaction of granting (interest free) loan by the applicant to Datex falling within the meaning of section 92B respectively. The main issue relates to application of sub sections (1) and (2) of Section 92 to the transaction in question in the light of the provisio....
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....f 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 legislative activity to counter such measures. The application of principle of transfer pricing is one such measure. The provisions of transfer pricing were first introduced by substituting Sections 92 to 92F for the then existing section 92 by Finance Act 2001; however, they were also substituted by new set of provisions - section 92 ....
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....elevant, 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 shall not be given effect to. 11. Of the questions posed before us, referred to above, question No. 1 requires us to determine whether loan of Rs.360 million by the applicant to Datex without charging interest and without adhering to the principle of arm's length price actually results in the Government exchequer or the t....
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.... 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 Lender's bank account. The overdue interest shall be paid with the principal amount. Though clause 6 provides that the loan will be made available by the Lender to the Borrower free of any interest, clause 7 stipulates that if the payment is delayed, default interest of 16% will be charged which has to be calculated fo....