2008 (6) TMI 228 - AT - Income Tax

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.

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