Commentary on Transfer Pricing

FEATURES OF THE TRANSFER PRICING REGIME UNDER CHAPTER X

2.0 Features of the Indian Transfer Pricing Regime (TPR) in Chapter X
Chapter X of the Act comprising sections 92 to 92F of the Act contain the legal provisions relating to transfer pricing.
These provisions apply to:
(i) International transactions between Associated Enterprises
(ii) Specified Domestic Transactions (SDTs) involving resident related parties.
The following features of the transfer pricing regime (TPR) of Chapter X may be noted:
♦ TPR does not levy any tax. TPR is not charging provision. [See Para 2.1]
♦ TPR is not any provision to disallow expense. [See Para 2.4]
♦ If any expense in respect of international transaction/SDT is otherwise allowable under other provisions of the
Act, TPR shall be applied to compute and restrict the amount of allowance.
♦ The word 'transfer price' should not mislead one to conclude that an international transaction sans consideration
is out of the ambit of TPR. It would fall within the ambit of TPR if it is taxable under any provision of the Act or
if parties dealing at arm's length would not have transacted without consideration. - Vodafone India Services (P.)
Ltd. v. Dy. CIT [2018] 89 taxmann.com 299 (Ahmedabad - Trib.)
♦ TPR in Chapter X is SAAR (Specific Anti-Avoidance Rule) as distinguished from GAAR (General Anti-
Avoidance Rule) in Chapter XA. [See Para 2.2/para 2.3]
♦ Chapter X envisages transfer pricing adjustment in respect of international transactions/SDTs by substituting the
ALP for the price of the transaction. [See Para 2.5]
♦ TP adjustments cannot be made for non-arms length conditions/aspects of a transaction other than price even if
DTAA contains provisions along the lines of Article 9 of OECD Model Convention.
♦ Availability of transacted value of international transaction/SDT is sine qua non for applicability of Chapter X.
[See Para 2.6]
♦ Re-write or re-characterisation of deal not permitted. TP is deal price re-write and not deal re-write. [See Para
2.7]
♦ Primary onus on taxpayer to prove that transacted value of IT/SDT is at arm's length by maintaining
documentation and getting audit done. [See Para 2.8]
2.1 TPR is not charging provision, only machinery provision
♦ Section 92(1) of the Act provides that "Any income arising from an international transaction shall be computed
having regard to the arm's length price".
♦ Section 92(2A) of the Act provides that "….any income in relation to a specified domestic transaction shall be
computed having regard to the arm's length price".
♦ Section 92 nowhere states that if there is a difference between arm's length price and transaction price in any
such transaction, the difference will be deemed to be an income.
♦ All that these provisions say is if income arises in an international transaction or a SDT, the amount of such
income will be computed with reference to the Arm's Length price.
♦ Whether income arises or not in an international transaction or SDT has to be determined by other provisions of
the Act.
♦ If in the light of other provisions of the Act, income arises in an international transaction or SDT, Chapter X shall
apply and the amount of such income shall be quantified with respect to Arm's Length Price.
Following points flow from the above as logical corollaries:
♦ If any international transaction is out of the ambit of charging provisions of the Act, TPR will not bring it to tax
merely because the actual price in it differs from arm's length price.
♦ If any income arises from any international transaction/SDT in terms of any charging provision of the Act, such
income shall be computed in accordance with TPR.
♦ TP not applicable in respect of income which is tax-exempt under a treaty.
 ♦ TP not applicable unless international transaction/SDT gives rise to any income includible in the scope of total
income.
♦ An international transaction between two associated enterprises will not attract the Transfer Pricing provisions of
IT Act, 1961, if the income such transaction is outside the scope of total income as per section 5 of the IT Act,
1961.
In Vodafone India Services (P.) Ltd. v. UOI [2015] 53 taxmann.com 286/231 Taxman 645 (Bom.)
♦ Showing the existence of an international transaction is not enough.
♦ Section 92 nowhere states that if there is a difference between arm's length price and transaction price in any
such transaction, the difference will be deemed to be an income.
♦ All that these provisions say is if income arises in an international transaction, the amount of such income will be
computed with reference to the arm's length price.
♦ Whether income arises or not in an international transaction has to be determined by other provisions of the Act.
If in the light of other provisions of the Act, income arises in an international transaction, Chapter X shall apply
and the amount of such income shall be quantified with respect to Arm's Length Price.
♦ The sine qua non to apply Chapter X would be arising of income under the Act out of an international
transaction.
♦ This income should be chargeable under the Act before Chapter X can be applied.
♦ Chapter X of the Act is a machinery provision to arrive at the ALP of a transaction between AEs.
♦ The substantive charging provisions are found in sections 4, 5, 15 (Salaries), 22 (Income from house property),
28 (Profits and gains of business), 45 (Capital gain) and 56 (Income from other Sources).
♦ Even Income arising from International Transaction between AE must satisfy the test of Income under the Act
and must find its home in one of the above heads i.e. charging provision.
CBDT has accepted the above decision in Vodafone (supra) vide Instruction No. 2/2015, dated 29-1-2015.
2.1-1 "Any income"
Section 92(1) uses the expression "any income ". "Any" is a word which excludes limitation or qualification (PER FRY,
L.J., Duck v. Bates, 53 LJQB 344; 12 QBD 79); "as wide as possible" (per CHITTY J. in Beckett v. Sutton, 51 LJ, Ch.
433). [P.R. Aiyar's Advanced Law Lexicon (2005 edition)].
Therefore, the following points emerge from the expression "any income" in section 92(1):
♦ Section 92(1) is not confined in application to those international transactions which are taxable as business
income. It will apply to incomes from international transactions which are taxable under other heads of income
such as 'capital gains' as well-Canoro Resources Ltd., In re [2009] 180 Taxman 220 (AAR - New Delhi)
♦ However wide the expression "any income" is, it does not cover any income not taxable under the substantive
charging provisions of the Act. This is because section 92(1) is not an independent charging provision but only a
computation provision - Dana Corporation, In re [2010] 186 Taxman 187 (AAR - New Delhi); Amiantit
International Holding Ltd., In re [2010] 189 Taxman 149 (AAR - New Delhi); Venenburg Group B.V, In re
[2007] 159 Taxman 219 (AAR - New Delhi); Deere & Co., In re [2011] 11 taxmann.com 388 (AAR - New
Delhi)
Issue of shares at a premium by assessee to its non-resident holding company does not give rise to any income from an
admitted International transaction and, thus, there is no occasion to apply Chapter X in such a case - Vodafone India
Services (P.) Ltd. v. UOI [2014] 50 taxmann.com 300/[2015] 228 Taxman 25 (Bom.).
In Vodafone India Services (P.) Ltd. v. UOI [2015] 53 taxmann.com 286/231 Taxman 645 (Bom.), it was held as under:
♦ The sine qua non to apply Chapter X would be arising of income under the Act out of an international
transaction. This income should be chargeable under the Act before Chapter X can be applied;
♦ The definition of income does not include within its scope capital receipts arising out of capital account
transaction unless so specified in section 2(24) as income;
♦ There is no charge in the Act to tax amounts received and/or arising on account of issue of shares by an Indian
entity to a non-resident entity in sections 4, 5, 15, 22, 28, 45 and 56. This is as it arises out of capital accounts
transaction and, therefore, is not income;
♦ Chapter X does not contain any charging provision but is a machinery provision to arrive at ALP of a transaction
between associated enterprises;
♦ The ALP is meant to determine the real value of the transaction entered into between AEs;
♦ It is a re-computation exercise to be carried out only when income arises in case of an International transaction
between AEs;
♦ It does not warrant re-computation of a consideration received/given on capital account;
 ♦ It permits re-computation of Income arising out of a Capital Account Transaction, such as interest paid/received
on loans taken/given, depreciation taken on machinery etc.;
♦ Chapter X of the Act is a machinery provision to arrive at the ALP of a transaction between AEs. The substantive
charging provisions are found in sections 4, 5, 15 (Salaries), 22 (Income from house property), 28 (Profits and
gains of business), 45 (Capital gain) and 56 (Income from other Sources);
♦ Even Income arising from International Transaction between AE must satisfy the test of Income under the Act
and must find its home in one of the above heads i.e. charging provision.
CBDT has accepted the above decision in Vodafone (supra) vide Instruction No. 2/2015, dated 29-1-2015.
The following judicial rulings may also be noted:
♦ Issue of shares at a premium by assessee to its AE at Mauritius did not give rise to any income from an
international transaction and Chapter X could not be applied in such a case in absence of charging provision to
tax issue of shares at premium to a non-resident - ATC Telecom Tower Corporation (P.) Ltd. v. Addl.CIT [2015]
57 taxmann.com 249/154 ITD 95 (Mumbai-Trib.)
♦ On issuance of shares by an Indian entity to its non-resident AEs, no income arises; hence, transfer pricing
provisions under Chapter X would not be applicable - Shell India Markets (P.) Ltd. v. Asstt. CIT [2014] 51
taxmann.com 519/[2015] 228 Taxman 99 (Bom.)
♦ Difference between ALP at which equity shares had to be issued and prices at which equity shares had actually
been issued did not give rise to any income from an admitted International transaction - S.G. Asia Holdings
(India) (P.) Ltd. v. Dy. CIT [2015] 54 taxmann.com 376/229 Taxman 452 (Bom.)
♦ Issue of shares at a premium by assessee to its non-resident holding company does not give rise to any income
from an admitted international transaction and, thus, there is no occasion to apply Chapter X in such a case - SKR
BPO Services (P.) Ltd. v. ITO [2015] 55 taxmann.com 84/230 Taxman 192 (Bom.)
♦ Issue of equity shares by assessee-company to its AE located abroad is on capital account and provisions of
Chapter X would not apply to such a transaction - Equinox Business Parks (P.) Ltd. v. Union of India [2015] 55
taxmann.com 222/230 Taxman 191 (Bom.)
♦ Revenue authorities could not bring to tax under Chapter X of Act shortfall of amounts receivable on issue of
equity shares to Associated Enterprise when benchmarked against arm's length price at which equity shares ought
to have been issued - Shell India Markets (P.) Ltd. v. UOI [2015] 64 taxmann.com 262 (Bom.)
In First Blue Home Finance Ltd. v. Dy. CIT [2015] 59 taxmann.com 431 (Delhi - Trib.) it was held as under :
♦ In case of issue of shares by assessee-company to its AE located abroad at issue price equal to its face value even
though book value of the share exceeded face value, there is no provision in Chapter X mandating addition to
assessee's ALP on account of less share premium received and also consequential interest on resultant deemed
loan.
♦ If an international transaction with its determined ALP does not lead to the generation of any income chargeable
to tax, then the provisions of section 92(1) are not magnetized.
♦ An income is chargeable to tax, if it is either of a revenue character or of a capital nature having been specifically
included in the ambit of income under the Act.
♦ The definition of income does not specifically include within its purview any capital receipt arising on issue of
share capital. Thus it follows that the issue of shares at par or premium is a transaction on capital account, which
does not affect the computation of total income of a company.
♦ Here it is important to mention that the Finance Act, 2012 with effect from 1-4-2013 has inserted clause (viib) to
section 56(2). The above provision makes it explicit that where a company, not being a one in which public are
substantially interested, receives consideration for issue of shares exceeding the fair market value of the shares,
then the consideration received for such shares as exceeds the fair market value of the shares is considered as
income under the head 'Income from other sources'. To put it simply, if a share with the face value of Rs. 10 is
issued for Rs. 50 and the fair market value of such share is Rs. 15, then the excess premium received amounting
to Rs. 35 (Rs. 50 minus Rs. 15) shall be treated as the income of the company chargeable under this provision.
♦ It is further relevant to note that this provision is attracted only when the share capital is issued to any person
being a resident. Au contrarie, if the shareholder is a non-resident then the mandate of this provision does not
apply. The assessee-company issued shares to its non-resident AEs and section 56(2)(viib) applies only when a
shareholder is resident.
♦ Moreover, this provision operates only when the company issues shares at a price above the fair market value
and not vice versa. On the other hand, one is confronted with a converse situation, in which the assessee-
company, as per the opinion of the authorities below, has received share application equal to the face value of
share in full and final settlement at a price less than the fair market value.
♦ Once neither the amount of face value of the shares issued nor the expected share premium leads to the accrual of
an income chargeable to tax in the hands of the issuing company, there can be no question of substituting the
 transacted value of the international transaction with its ALP.
2.1-2 Chapter X - Whether applicable to gift of shares to AE
Where assessee, an Indian company, transferred shares of its subsidiary company to another group concern located abroad
without any consideration, it amounted to transaction of gift and in absence of any income element involved, transaction
in question could not be subjected to transfer pricing provisions - Redington (India) Ltd. v. Jt. CIT [2014] 49 taxmann.com
146 (Chennai-Trib.)
It would appear that the above position would undergo a change in view of new clause (x) inserted by the Finance Act,
2017 in section 56(2) of the Act. The provisions of clause (viia) of section 56(2) provide that receipt of shares of a closely-
held company by a firm or a company in which the public are not substantially interested is also chargeable to income-tax
in case such receipt is in excess of Rs. 50,000 and is received without consideration or for inadequate consideration. The
Finance Act, 2017 has amended section 56(2)(viia) so that it will not apply to gifts of shares received by a company on or
after 1-4-2017. The new clause (x) brings into the tax net receipt of shares of a company without consideration or for
inadequate consideration on or after 1-4-2017. New clause (x) is wider in scope than clause (viia). As against clause (viia)
which applied only where recipient- company was a closely-held company, clause (x) applies to any recipient-company.
Further, clause (viia) applied only when shares received were of closely-held company whereas clause (x) would apply
irrespective of whether shares received were of a closely-held company or widely-held company. A transaction such as
that in Redington (supra) which takes place on or after 1-4-2017 would appear to be taxable under new clause (x) subject
to the provisions of section 9(1)(i) of the Act.
2.1-3 Applicability of Chapter X to purchase of fixed assets
If there is an international transaction in capital field, which does not otherwise give rise to any income in itself, then even
though its ALP may be computed in consonance with provisions, but no adjustment can be made for difference between
declared value and ALP of such international transaction. Purchase of fixed assets is an international transaction and is
required to be benchmarked as per most appropriate method. However, an increase in value of fixed assets after
application of ALP, being a capital transaction in itself, will not give rise to any addition towards transfer pricing
adjustment, but depreciation on such assets, being a revenue offshoot of capital transaction, will be required to be
recomputed on such revised value.- Honda Motorcycle & Scooters India (P.) Ltd. v. Asstt. CIT [2015] 56 taxmann.com
237/154 ITD 21/170 TTJ 273 (Delhi - Trib.)
In case of purchase of fixed assets from AE, it is amount of depreciation on purchase of such fixed assets which will be
considered for making addition and not difference between transacted value and ALP determined at Nil - Ciena India (P.)
Ltd. v. ITO [2015] 59 taxmann.com 92 (Delhi-Trib.)
2.1-4 Difference between ALP and issue price of shares issued to AE is not a deemed loan
In view of order passed in case of Vodafone India Services (P.) Ltd. v. UOI [2014] 50 taxmann.com 300 (Bom.) shortfall
in amounts received on issue of shares to non-resident AE's when compared to that receivable on basis of ALP, along with
interest on above shortfall could not be brought to tax - Essar Projects (India) Ltd. v. UOI [2015] 54 taxmann.com
115/229 Taxman 162 (Bom.)
Where an Indian company issued its shares to its non-resident AE at lower price than its fair market value, there can be no
deemed loan due to under-receipt of share premium, and there is no mandate of determination of ALP of interest on such
deemed loan - First Blue Home Finance Ltd. v. Asstt. CIT [2015] 62 taxmann.com 80 (Delhi-Trib.)
2.1-5 Section 92 vis-à-vis section 5
According to ICAI's Revised Guidance Note on Transfer Pricing, an international transaction between two associated
enterprises (both non-residents) will not attract the Transfer Pricing provisions of IT Act, 1961, if the income such
transaction is outside the scope of total income as per section 5 of the IT Act, 1961.
2.2 TPR is anti-abuse or anti-avoidance, not anti-evasion
In SIRO Clinpharm (P.) Ltd. v. Dy. CIT [2016] 177 TTJ (Mum.) 609, it was held as under:
♦ Every anti-abuse legislation, whether SAAR (specific anti-abuse rule) or GAAR (general anti-abuse rule), is a
legislation seeking the taxpayers to organize their affairs in a manner compliant with the norms set out in such
anti-abuse legislation.
♦ An anti-abuse legislation does not trigger the levy of taxes; it only tells you what behaviour is acceptable or what
is not acceptable.
♦ What triggers levy of taxes is non-compliance with the manner in which the anti-abuse regulations require the
taxpayers to conduct their affairs. In that sense, all anti-abuse legislations seek a certain degree of compliance
with the norms set out therein.
The following points are noteworthy :
♦ TPR is anti-avoidance, not anti-evasion. This is clear from the provisions of the Black Money (Undisclosed
Foreign Income & Assets) and Imposition of Tax Act, 2015.
♦ TP adjustments are excluded from scope of "undisclosed foreign income" under the said Act.
 ♦ TPR does not presume that the price at which the taxpayer has transacted with a related party is not the actual
price.
♦ There is no presumption of over-invoicing or under-invoicing in TPR.
♦ TPR accepts that price shown by taxpayer in books of account and documents in respect of related party
transactions as the actual price at which dealing has been done and then proceeds to benchmark that against arm's
length price (ALP).
♦ This "deal price substitution" is entirely different from section 50C of the Act which is an anti-tax-evasion
provision. There, the presumption is that the taxpayer has suppressed the actual consideration exchanged in sale
of immovable property from the agreement and has shown less on paper than what actually exchanged hands.
There, the provisions substitute agreement value of consideration with stamp duty value.
2.3 TPR is SAAR as distinguished from GAAR of Chapter X-A
♦ TPR is Specific Anti-Avoidance Rule (SAAR) enacted to curb avoidance of tax through related party transactions
which are not priced at arm's length.
♦ In such cases, the transaction price is substituted by Arm's Length price and additions made to taxable income
called "Transfer Pricing Adjustments".
♦ By way of contrast with specific anti-avoidance provisions which are directed to particular defined situations, the
legislature through GAAR has raised a general anti-avoidance yardstick by which the line between legitimate tax
planning and improper tax avoidance is to be drawn. GAAR provisions are contained in Chapter X-A comprising
sections 95 to 102.
The following points are important:
♦ Where SAAR is applicable to a particular aspect/element, then GAAR shall not be invoked to look into that
aspect/element. [Shome Committee report]. Bowman A.C.J. in the Canadian case Geransky v. The Queen [2001]
2 CTC 2147 at paragraph 42 "...The Income Tax Act is a statute that is remarkable for its specificity and replete
with anti-avoidance provisions designed to counteract specific perceived abuses. Where a taxpayer applies those
provisions and manages to avoid the pitfalls the Minister cannot say "Because you have avoided the shoals and
traps of the Act and have not carried out your commercial transaction in a manner that maximizes your tax, I will
use GAAR to fill in any gaps not covered by the multitude of specific anti-avoidance provisions".
♦ However, the Govt. of India Press Release in PIB website states that "Where GAAR and SAAR are both in force,
only one of them will apply to a given case, and guidelines will be made regarding the applicability of one
or the other."
2.4 Chapter X and allowance and disallowance of expenditure
In Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 55 taxmann.com 240/231 Taxman 113 (Delhi) it
was held as under :
♦ Chapter X of the Act relates to arm's length pricing adjustment. Chapter X is not concerned with disallowance of
expenditure but relates to determination of arm's length price/cost of an international transaction between the two
AEs or of a specified domestic transaction. It relates to income or receipts, and also expenses and interest but in a
different context.
♦ Impact of Chapter X cannot be controlled or curtailed by reference to the allowability of expenditure. Provisions
of Chapter X are applicable to international transactions between two related enterprises and to SDTs. The
purpose of determination of arm's length price is to find out the fair and true market value of the transaction and
accordingly the adjustment, if required, is made. The said exercise has its own object and purpose.
2.5 Nature of TP adjustments envisaged under Chapter X
In Maruti Suzuki India Ltd. v. CIT [2015] 64 taxmann.com 150 (Delhi), it was held that the only TP adjustment authorised
and permitted by Chapter X is the substitution of the ALP for the transaction price or the contract price.
See also the Delhi High Court decisions in CIT v. Whirlpool of India Ltd. [2015] 64 taxmann.com 324; Honda Siel Power
Products Ltd. v. Dy. CIT [2015] 64 taxmann.com 328.
From the Delhi High Court decisions, it is clear that Chapter X allows TP adjustments only if the price in a transaction
between associated enterprises is not at arm's length. There may be conditions (other than price) in such a transaction
which may not be at arm's length. Question arises whether TP adjustments can be made in respect of such non-price
conditions which are not arm's length?
Article 9 (Associated Enterprises article) of OECD model convention defines arm's length standard and TP adjustments as
under:
"……conditions are made or imposed between the two (associated) enterprises in their commercial or financial
relations which differ from those which would be made between independent enterprises, then any profits which
would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions"
Article 9 provides for TP adjustments in respect of a transaction between two AEs (related parties) not only if price is not
at arm's length but also if other non-price conditions are not at arm's length. Article 9 requires that there be an examination
of the "conditions" operating between the two associated enterprises – not just the price – and an evaluation of profits
absent the identified "conditions". That is, Article 9 did not envisage that one should take a related party loan transaction
exactly as one found it and price the interest payable on the transaction (if that was even possible). Article 9 recognised
that associated entities may have dealings which are non-arm's length for reasons apart from the price that is attributed to
them. However, TP adjustments under Article 9 cannot be made independent of the domestic transfer pricing legislation
even if relevant DTAA contains an associated enterprises article along the lines of Article 9. A DTA does not give a
Contracting State power to tax, or oblige it to tax an amount over which it is allocated the right to tax by the DTA. Rather,
a DTA avoids the potential for double taxation by restricting one Contracting State's taxing power. Therefore, Article 9 of
the United States convention, independently of the transfer pricing provisions in the domestic legislation (for example
SubDiv 815-A - Treaty Equivalent Transfer Pricing Rules of Australia or section 34-D of Singapore's IT Act drafted along
the lines of Article 9), cannot be relied on to support the TP adjustments pursuant to Article 9. - See Chevron Australia
Holdings Pty. Ltd. v. Commissioner of Taxation (No. 4) [2015] FCA 1092
In Chevron (supra) it was held by the Federal Court of Australia that TP adjustments may be made by way of
disallowance of excess interest paid on loan from AE even if non-price conditions of loan which are not at arm's length if
DTAA contains Article 9 (Associated Enterprises article) and if adjustment pursuant to Article 9 is permissible under
domestic transfer pricing regulations such as "Treaty Equivalent Transfer Pricing Rules" of Australia. Where it is found
that parties dealing at arm's length would have incorporated security and operational and financial covenants in a loan
agreement which would have gone to lower the interest rate on the loan, then TP adjustments by way of disallowance of
excess interest paid (excess over arm's length) on loan from AE is justified if relevant DTAA contains Article 9
(Associated Enterprises article) and TP adjustment pursuant to Article 9 is authorized by domestic TP law along the lines
of "Treaty Equivalent Transfer Pricing Rules"(Div 815-A) in Australian law. Further, comparing conditions agreed
between AEs with conditions that parties dealing at arm's length would agree is justified under Art. 9 and TETPR and does
not amount to rewrite or recharacterisation of transaction.
How far the Chevron ratio would apply in Indian Context is the moot point given that section 92A(2)(i) refers to "the
prices and other conditions". Section 92A(2)(i) provides that two enterprises shall be deemed to be "Associated
Enterprises" in relation to each other if at any time during the previous year if the goods or articles manufactured or
processed by one enterprise are sold to the other enterprise or to persons specified by the other enterprise, and the prices
and other conditions relating thereto are influenced by such other enterprise.
The highlighted words in section 92A(2)(i) have a limited role in that the ability of one enterprise (purchaser) to influence
price and other conditions of transactions makes both enterprises (purchaser and seller) "Associated enterprises" by a
deeming fiction. This deeming fiction can be considered only for treating both enterprises as AEs. This deeming fiction
cannot be stretched further to make TP adjustments in respect of non-price conditions of a transaction between at AEs if
they are not at "arm's length".
2.6 No TP additions if transacted value not available
Addition on account of transfer pricing adjustment can be made by making a comparison between the transacted value of
an international transaction and its ALP. Thus, it is clear that the availability of the transacted value of an international
transaction is sine qua non. If such transacted value is either not separately available or cannot be precisely determined
from a combined value of a number of international transactions, then the entire exercise of determining ALP fails. Thus,
where there was a payment of inseparable royalty for use of both licensed information and licensed trademarks, no
addition could be made on account of transfer pricing adjustment of royalty for use of licensed trademark only - Maruti
Suzuki India Ltd. v. Addl. CIT [2015] 60 taxmann.com 411 (Delhi-Trib.)
2.7 Chapter X does not permit re-write or re-characterisation of transaction
It is not open to the revenue authorities to recharacterize the transaction unless it is found to be a sham or bogus
transaction. While there are no specific powers vested in the TPO to recharacterize the transaction, even under the judge
made law, such recharacterization can be done by the revenue authorities when the transactions are found to be
substantially at variance with the stated form. TPO cannot re-characterise share application money paid by assessee to its
foreign subsidiaries as interest free loan from date of payment to date of actual allotment of shares - Bharti Airtel Ltd. v.
Asstt CIT [2014] 43 taxmann.com 150 (Delhi-Trib.)Where assessee company has paid share application money to its AE,
but delay occurred in issuance of share certificates, that does not mean that up to date of allotment, said transaction could
be treated as international transactions of loans given by assessee to its AE - Parle Biscuits (P.) Ltd. v. Dy. CIT [2014] 46
taxmann.com 11 (Mumbai-Trib.) Share application money cannot be treated as loan amount merely because there was
delay in issuance of shares by subsidiary in name of assessee and cause of delay was duly explained by assessee - Aditya
Birla Minacs Worldwide Ltd. v. Dy. CIT [2015] 56 taxmann.com 317/69 SOT 18 (Mum. - Trib.) (URO)
Investments in nature of equity, cannot be treated as loans and advances and hence, no adjustment was warranted on share
application money pending allotment - Mylan Laboratories Ltd. v. Asstt. CIT [2015] 63 taxmann.com 179 (Hyd. - Trib.)
2.8 Rebuttable presumption that international transactions/ SDTs are not at arm's length
♦ Transfer Price is the actual price charged in a transaction.
 ♦ Transfer Pricing is not a case of under-invoicing or over-invoicing where price shown in documents is different
from the actual price.
♦ But there is a rebuttable presumption in law that transfer prices in international transactions with AEs/or in SDTs
are fixed at variance from arm's length price.
♦ Arm's Length Price is "what would have been the price if the transactions were between two unrelated parties,
similarly placed as the related parties in so far as nature of product, conditions and terms and conditions of the
transactions are concerned?"
♦ The onus is on assessee to show that the transfer prices are close to or approximate what would have been the
prices under arm's length conditions.
♦ The primary onus is on the taxpayer to determine an arm's length price in accordance with the rules and to
substantiate the same with prescribed documentation. - Maruti Suzuki India Ltd v. Addl. CIT, TPO [2010] 192
Taxman 317/328 ITR 210/233 CTR 105 (Delhi)
2.9 TPR can't be invoked where applying ALP will reduce income/increase loss
Since the intention underlying section 92 is "to prevent avoidance of tax by shifting taxable income to a jurisdiction
outside India by an associate enterprise controlling the prices charged in intra-group transactions", section 92(3) provides
that the provisions shall not apply in a case where the application of arm's length price results in reduction of income
chargeable to tax in India. In other words, transfer pricing provisions of section 92 shall be invoked only where it benefits
the Revenue and not where it benefits the assessee.
CBDT's Circular No. 8/2002 clarifies that the provisions of section 92 would not be applicable in a case where the
application of arm's length price results in reduction of income chargeable to tax in India.
Where computation of income was done, considering arm's length price for international transactions and such
computation resulted in reducing income chargeable to tax or increasing loss, as the case may be, then computation that
had to be considered was one done based on entries made in books in respect of such international transactions - Visteon
Technical & Services Centre (P.) Ltd. v. Asstt. CIT [2012] 24 taxmann.com 353 (Chennai).
When as a result of computation of income on basis of arm's length price, income of assessee is lowered or loss is
increased, provisions of computation of income on basis of arm's length price would not be applicable. The assessee was
rendering IT enabled services to its AEs. It also availed management support services. The management support services
formed part of its cost base as these were linked to its main transaction of rendition of IT enabled services. The assessee
had recovered operating cost plus 20 per cent from its AEs, in respect of rendition of its IT enabled services. The TPO
made the ALP adjustment, for the IT enabled services by adopting an ALP margin of 29.53 per cent as against margin of
20 per cent adopted by the assessee. The TPO also concluded that so far as the intra group services received by the
assessee was concerned, the ALP value of the same was NIL. The DRP deleted the adjustment on account of rendition of
IT enabled services but made ALP adjustment in respect of intra group services. Held that this is a case in which transfer
pricing provisions cannot be applied because the application of ALP adjustment will indeed result in erosion of Indian tax
base as visualized by the scheme of section 92(3). - Mercer Consulting India (P.) Ltd. v. Dy. CIT [2016] 72 taxmann.com
323/180 TTJ 145 (Delhi)
2.10 Nature of penalties for TP non-compliances
In DDIT v. Sun Chemicals BV [2009] 118 ITD 311/[2008] 24 SOT 199/[2009] 120 TTJ 1087 (Mum.) it was held that the
benefit of Indo-Netherlands DTAA cannot be denied to the assessee on account of defaults in complying with TP
provisions such as :
♦ not disclosing the purchase transactions effect with associate concerns in Form No. 3CEB;
♦ not disclosing the ALP in respect of share transactions with associate enterprises, which resulted in contravention
of the provisions of section 92C.
Article 3(d) of the DTAA defines the term 'tax'. A bare reading of the definition of 'tax' shows that the term tax shall not
include the amount which is payable in respect of default or omission in relation to taxes to which the convention applies.
A close reading of the above would reveal that the amount which is excluded from the term 'tax' must be the amount
which is payable under laws of either State; that such amount must be payable on account of default or omission by the
assessee; and that such default or omission must relate to the taxes to which convention applies. The words 'shall not
include any amount which is payable' are of utmost importance. The provisions of sections 92 to 92F do not relate to any
amount payable by the assessee either by way of tax or 'interest' or penalty. All these provisions relate to the determination
of ALP of international transactions. Therefore, the default, if any, relating to the provisions of sections 92 to 92F would
not be covered by the default or omission mentioned in article 3(d). As the default or omission relating to the provisions of
sections 92 to 92F are not covered by the default or omission mentioned in article 3(d) of DTAA, the order of the
Commissioner (Appeals) allowing the benefit of DTAA deserved to be upheld.
2.11 Whether there must be material showing transfer of profits outside India/evasion of taxes before Chapter X
can be invoked in respect of international transactions?
In Coca Cola India Inc v. Asstt. CIT [2009] 177 Taxman 103 (Punj. & Har.), it was held that there is no statutory
requirement that, for invoking the provisions of Chapter X, it is necessary to establish that there is transfer of profits
outside India or that there is evasion of tax. Only condition precedent for invoking provisions of Chapter X is that there
should be income arising from international transaction.
In Aztec Software & Technology Services Ltd. v. Asstt. CIT [2007] 107 ITD 141 (Bang. - Trib.) (SB), it was held as under:
♦ Tax Avoidance not a condition precedent for invoking section 92C/92CA.
♦ A perusal of the provisions of sections 92C and 92CA reveals that these provisions can be invoked by the
Assessing Officer and he can proceed to determine ALP where he either finds the existence of the circumstances
mentioned in clauses (a) to (d) of section 92C(3) or where he considers it necessary and expedient to refer the
determination of ALP to the TPO. There is no other requirement for invoking these provisions by the Assessing
Officer.
♦ Besides, as per the mandate of section 92(1), income from international transaction between associated
enterprises has to be computed having regard to ALP.
♦ There is nothing in the language employed by the Legislature on the basis of which it can be said that the
Assessing Officer must demonstrate the avoidance of tax before invoking these provisions.
In Hyper Quality India (P.) Ltd. v. Asstt. CIT [2014] 45 taxmann.com 102 (Delhi-Trib.) it was held that TP adjustments
made to assessees ALP were not justified as assessee had earned profit in India whereas its AE had continuously sustained
losses, FAR had not been properly evaluated by TPO and DRP, proper justifications for applying TNM method had not
been assigned by lower authorities and no objective justifications were provided by lower authorities as to why and how,
PS method applied by assessee in above peculiarities of business was not an appropriate method. Thus TP adjustments
added to income of assessee were to be deleted.
It was held that the TP adjustments made to assessee's ALP is not justified in view of following reasons:
(i) Assessee furnished its split financials along with AE. Whereas the assessee has earned profit in India, its AE
has continuously sustained losses. Thus with no element of profit in the hands of the AE, in all fairness
there is no case of shifting of profits, practicable or probable.
(ii) AE is resident in USA which has a higher tax rate in India, therefore, little commercial prudence to shift profit
out of India.
(iii) The FAR has not been properly evaluated by TPO and DRP.
(iv) Proper justifications for applying TNM method have not been assigned by lower authorities.
(v) No objective justifications are provided by lower authorities as to why and how, PS method applied by assessee
in the above peculiarities of business was not an appropriate method.