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2004 (11) TMI 16 - AAR - Income TaxIndian company (Datex), a tax resident of India, is a wholly owned subsidiary company of a non-resident company (Instrumentarium) - Datex operates as distributor of Instrumentarium in the Indian market Question Whether granting of loan by applicant to Datex , which is its wholly owned subsidiary company incorporated in India, without charging any interest, actually results in the Government exchequer does not fall within the meaning of Advance ruling, hence no ruling is pronounced
Issues Involved:
1. Whether the interest-free loan granted by the non-resident applicant to its wholly-owned Indian subsidiary results in a benefit to the Indian Government's tax revenue. 2. Whether the payment of interest at arm's length price on the loan would have resulted in tax savings for the Indian subsidiary and a tax liability for the non-resident applicant, thereby eroding India's tax revenue. 3. Whether the applicant is required to comply with the transfer pricing provisions of the Income-tax Act, 1961, with respect to the interest-free loan transaction. 4. Whether the provisions of the India-Finland Tax Treaty exempt the applicant from the rigors of Indian transfer pricing legislation. 5. Whether the non-discrimination clause in the India-Finland Tax Treaty exempts the applicant from charging arm's length price interest on the loan. Detailed Analysis: Issue 1: Benefit to Indian Government's Tax Revenue The ruling determined that the question of whether the interest-free loan benefits the Indian Government's tax revenue does not fall within the meaning of "advance ruling" under Section 245N(a)(i) of the Income-tax Act. The Authority held that its determination should relate to the tax liability of the non-resident applicant arising out of the transaction, not the impact on the revenue of the State. Issue 2: Tax Savings and Revenue Erosion The applicant argued that charging interest at arm's length price would result in tax erosion due to the differential tax rates applicable to the Indian subsidiary and the non-resident applicant. The Authority did not directly address this issue as it reframed and focused on whether the applicant must comply with transfer pricing provisions. Issue 3: Compliance with Transfer Pricing Provisions The Authority ruled that the applicant is required to comply with the provisions of Sections 92 to 92F of the Income-tax Act. The ruling emphasized that the assessing officer must compute the arm's length price and determine the total income accordingly. Sub-section (3) of Section 92, which provides that transfer pricing provisions do not apply if it reduces the income chargeable to tax or increases the loss, can only be invoked at the assessment stage with full facts before the assessing officer. Issue 4: Exemption under India-Finland Tax Treaty The Authority did not specifically address this issue in the ruling. The focus was on the applicability of Indian transfer pricing provisions rather than exemptions under the tax treaty. Issue 5: Non-Discrimination Clause in India-Finland Tax Treaty The Authority did not pronounce any ruling on this additional question as no arguments were addressed. The ruling focused on the requirement to comply with Indian transfer pricing provisions. Conclusion: The Authority concluded that: - The question of whether the interest-free loan benefits the Indian Government's tax revenue does not fall within the scope of "advance ruling." - The applicant must comply with the transfer pricing provisions of the Income-tax Act, and interest must be charged as per the principles of arm's length price. - No ruling was pronounced on the additional questions regarding the India-Finland Tax Treaty due to the lack of arguments presented. Final Pronouncement: The Authority ruled that: - Question 1 does not fall within the meaning of "advance ruling." - No ruling on Question 2 as it was not pressed. - Question 3 requires compliance with transfer pricing provisions, and interest must be charged at arm's length price. The ruling was pronounced on November 25, 2004, with appreciation for the assistance provided by the learned Solicitor General.
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