2018 (3) TMI 1849 - HC - Income Tax

TP Adjustment - adjustment under section 92 of the Act with respect to a transaction between the holding company and 100% subsidiary company with respect to advance on which no obligation to charge interest existed and the adjustment made under section 92 resulted into a notional income and not real income - addition on account of interest can only be made on real income and not on notional income - HELD THAT - Chapter X of the Act, is an antiavoidance measure and not an antievasion measure. It is not premised on the basis that the transactions entered into between the parties suffers from under/over invoicing. It accepts the value shown in the books of the Assessee. However, the value of the transactions by legislative mandate is brought in line with the consideration which would pass between two independent parties i.e. nonrelated/ nonassociated enterprises. In fact, when the new provisions viz Section 92 to 92F of the Act was introduced w.e.f. Assessment Year 200203, the Explanatory Notes to the Finance Act, 2001 explained its objectives. The Legislature has introduced a special provisions in respect of International Transactions to bring the income to tax having regard to Arms Length Price (ALP). In such case, the parties are obliged is to establish the ALP of the International Transactions entered into between the two AE is to bring to tax the real income i.e. the correct price of the transactions, shorn of, the price arrived at on account of relationship. It means the real income on application of a new measure. The object of the Transfer Pricing Officer is to put a stop to capital erosion and transfer of profits from one taxable territory to another taxable territory. No substantial question of law.

Summary

Issues:
1. Challenge to the order of the Income Tax Appellate Tribunal under Section 260A of the Income Tax Act, 1961.
2. Justification of the action of the Assessing Officer in making adjustments under section 92 of the Act.
3. Classification of loans and advances given to Associated Enterprises as International Transactions.
4. Determination of Arms Length Price (ALP) for interest income earned on loans and advances.
5. Addition of interest on real income versus notional income.
6. Interpretation of Chapter X of the Act as an anti-avoidance measure.
7. Legislative objective behind the introduction of new transfer pricing regulations.
8. Obligation to establish Arms Length Price (ALP) for International Transactions.
9. Objective of the Transfer Pricing Officer in preventing capital erosion and profit transfer.

Analysis:
The High Court of Bombay heard an appeal challenging the Income Tax Appellate Tribunal's order related to the Assessment Year 2009-10 under Section 260A of the Income Tax Act, 1961. The main question raised was whether the Tribunal was correct in confirming the Assessing Officer's adjustment under section 92 of the Act regarding a transaction between a holding company and its 100% subsidiary company where no obligation to charge interest existed, resulting in a notional income. The Tribunal's order dismissing the appeal filed by the Respondent was based on the directions given by the Dispute Resolution Panel. It held that loans and advances to Associated Enterprises (AE) by the Appellant-Assessee constituted International Transactions under Chapter X of the Act, necessitating a reworking of interest income to determine the Arms Length Price (ALP), thereby increasing the income of the Respondent-Assessee.

The appellant's argument that the addition of interest should only be made on real income, not notional income, was countered by the court, emphasizing that Chapter X of the Act serves as an anti-avoidance measure rather than an anti-evasion measure. The legislation aims to align the value of transactions between related parties with what would occur between independent entities. The court highlighted the legislative intent behind the introduction of transfer pricing regulations, emphasizing the objective of preventing profit shifting through manipulation of prices in International Transactions, thereby protecting the tax base.

The court reiterated that the introduction of special provisions for International Transactions aims to tax income based on Arms Length Price (ALP), requiring parties to establish the correct price of transactions to ensure taxation of real income, free from any influence due to the relationship between the parties. The Transfer Pricing Officer's role is crucial in preventing capital erosion and profit transfer between taxable territories. Given the established legal position, the court found that the question raised did not present a substantial legal issue, leading to the dismissal of the appeal without any costs.