2019 (12) TMI 1153 - AT - Income Tax

Transfer pricing (TP) adjustments - notional/book adjustment - correct interpretation or construction of section 092 / 92C/ 92CA - income chargeable to tax in India - whether the provisions of chapter X shall be invoked in a situation where the assessee is enjoying tax exemption under section 10A of the Act and/or where there is no motive to avoid tax? - HELD THAT - the purpose behind the provision of transfer pricing is to determine true profits/income as if such international transaction has been entered with an unrelated party or non-AE, irrespective of the fact that the income of the assessee was eligible for exemption. - there is no express provision under the Act restricting the application of section 92C of the Act for determining the income at arm s length where such income is eligible for deduction u/s 10A of the Act. On the contrary, there is a proviso to section 92C(4) of the Act which prohibits the deduction u/s 10A of the Act on the income to the extent enhanced as an effect of a determination of ALP. If the purpose or object of Chapter X and/or Section 10A of the Act is being defeated, then it is up to the legislature, if they think so, to reconstruct the law as per the required object. - there is no need to look into the intention or purpose of the statute or application of reasonable construction. Accordingly, it is meaningless to apply the principles of purposive or object-based rules of interpretation Indeed, in the instant case, albeit the adjustment in the ALP for the year under consideration may be of notional value, and the same may not actually result in an inflow of foreign exchange. But the said proviso to section 92C(4) of the Act shall deter the practice of manipulating the prices as suiting to the parties. - Consequently, the purpose of the provisions of section 10A of the Act will not be defeated. We further note that assessee though claiming the exemption under section 10A of the Act can also manipulate the ALP with an objective to avoid corporate dividend tax by shifting its profits to AE. In the instant case we find that the provisions of chapter X are not impeding with the manner of the computation of exemption under section 10A of the Act, but it is to work out the true ALP qua the sale price of the impugned international transaction. Therefore we disregard the contentions of the ld. AR for the assessee that no reference to the TPO can be made for determining the ALP. AR also contended that it is a settled legal position that where two views are possible, the one in favor of the assessee should prevail and to support his contention, also placed reliance on a series of case laws. In this regard, we concur with the view of the ld. AR for the assessee. But in the case on hand there are contrary views on the impugned issue, accordingly, this special bench has been constituted to decide the question referred to it after considering the fact, rival submissions, and the legal position. Interpretation of the provision of the Act, which gives rise to two different possible views. In the case on hand, the issue relates to the provisions of section 10-A viz-a-viz Chapter-X of the Act which operates in different domains and has different objects. As such, none of the provision has neither been made subject to each other nor superseded by each other. Therefore we are of the view that the question of two views about the interpretation to section 10-A viz a viz chapter-X in the given facts and circumstances does not arise. But these provisions co-exits and their concordance are facilitated by the proviso to section 92C(4) of the Act. As such, there is a direct provision under chapter X of the Act restricting the deduction/ exemption to the assessee in this particular case, which will prevail in the given facts circumstances. Regarding the Non-discrimination clause in the DTAA between India and UK, we find that the learned counsel s arguments proceed on the fallacious assumptions that while examining the applicability of the non-discrimination provisions, the transactions with a resident assessee can be compared with transactions of non-resident. Even if at the most the company was to transact business with its non-resident related party, the same course was to follow. There is thus no discrimination viz a viz the assessee and the domestic enterprises. We are of the view that even if an assessee is eligible for tax exemption at the rate of hundred percent under section 10A/10B of the Act, then also the arm s length price on international transactions deserve to be determined under section 92C. Hence, question posed before the Special Bench is answered in negative against the assessee and in favour of the Revenue.

Issues Involved:
1. Applicability of Transfer Pricing provisions under Section 92 of the Income Tax Act to an assessee eligible for tax exemption under Section 10A.
2. Requirement of demonstrating tax avoidance for invoking Transfer Pricing provisions.
3. Interpretation of statutory provisions and their application in the context of Transfer Pricing and tax exemptions.
4. Impact of international tax treaties and non-discrimination clauses on the application of Transfer Pricing provisions.
5. Procedural aspects related to the reference to the Transfer Pricing Officer (TPO).

Issue-wise Detailed Analysis:

1. Applicability of Transfer Pricing Provisions:
The core issue was whether the provisions of Section 92 can be invoked for an assessee eligible for tax exemption under Section 10A. The Tribunal held that the Transfer Pricing provisions are applicable even if the income is exempt under Section 10A. The rationale is that the purpose of Transfer Pricing rules is to ensure that transactions between associated enterprises are at arm's length, preventing the manipulation of prices to shift profits out of India. The Tribunal emphasized that the statutory language is clear and unambiguous, and the provisions of Chapter X must be applied to determine the true profits as if the transactions were with unrelated parties.

2. Requirement of Demonstrating Tax Avoidance:
The Tribunal rejected the argument that the Transfer Pricing provisions should only be invoked if there is a demonstrated motive of tax avoidance. It clarified that the provisions are intended to ensure that international transactions are conducted at arm's length, irrespective of whether there is an actual motive to avoid tax. The Tribunal noted that the statutory language does not require a demonstration of tax avoidance before invoking Transfer Pricing provisions.

3. Interpretation of Statutory Provisions:
The Tribunal emphasized the principle of interpreting statutory provisions based on their plain and unambiguous language. It referred to several judicial precedents to support the view that when the language of the statute is clear, there is no need to resort to external aids of interpretation. The Tribunal held that the proviso to Section 92C(4), which disallows deductions under Section 10A on the enhanced income due to Transfer Pricing adjustments, clearly indicates the legislative intent to apply Transfer Pricing provisions even to exempt income.

4. Impact of International Tax Treaties:
The Tribunal addressed the argument regarding the non-discrimination clause in the DTAA between India and the UK. It held that the tax laws in India cannot be subjected to foreign tax laws and that the provisions of Chapter X are applicable to ensure that international transactions are at arm's length. The Tribunal found no merit in the argument that the non-discrimination clause should prevent the application of Transfer Pricing provisions.

5. Procedural Aspects Related to TPO Reference:
The Tribunal discussed the procedural requirements for making a reference to the TPO. It noted that there is no express provision in Chapter X requiring the Assessing Officer to give the assessee an opportunity of being heard before making a reference to the TPO. The Tribunal referred to judicial precedents to support the view that the Assessing Officer must form an opinion based on available material and obtain the approval of the Commissioner before making a reference.

Conclusion:
The Tribunal concluded that the provisions of Section 92 can be invoked even if the assessee is eligible for tax exemption under Section 10A, and there is no need to demonstrate a motive of tax avoidance. The statutory language is clear and unambiguous, and the provisions must be applied to ensure that international transactions are at arm's length. The Tribunal rejected the arguments based on the non-discrimination clause in the DTAA and procedural objections related to the reference to the TPO. The question posed before the Special Bench was answered in the negative, against the assessee and in favor of the Revenue.

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