Transfer pricing not attracted in the absence of liability to pay tax: AAR

Applicant: Goodyear Orient Company (Private) Ltd.and anr. on 02^nd May, 2011

A.A.R. Nos. 1006 & 1031 of 2010

Assessment Year:

Relevant Facts:

1. The Applicants are

(i) GTRC, a company incorporated in the US

(ii) GOCPL, a company incorporated in Singapore

(iii) GIL, a company incorporated in India.

The companies manages natural rubber purchasing and other business.

2. Entity (i) owns 75% of the shares in entity (iii) and seeks to transfer it to entity (ii) through a Share Contribution Deed (SCD).

Applicants questions:

1. Whether applicant (i) would be charged capital gains or any other tax?

2. Whether transfer pricing provisions are applicable on applicant (i)?

3. Whether any TDS is required to be deducted by applicant (i)?

4. Whether any tax would arise on GOCPL u/s 56?

Allowing the application of the assessee, the Hon’ble Authority held that:

(i) In the absence of any consideration for transfer, no income may be attributed to the transferee and thus, capital gains tax would not be applicable.

(ii) In the absence of liability to pay tax, Transfer Pricing provisions would not apply.

The decision is available here.

OECD Updates

1. Valuation of intangibles in the area of Transfer Pricing is a contentious issue and is subject to debate. The OECD met with business commentators on the valuation of intangibles for transfer pricing purposes for a seamless and consistent application of the valuation techniques. The objective is to make sure that the Transfer Pricing valuation is done in accordance with the arms length principle. The meeting is reported here.

2. The Global Forum of Transparency has added Ghana, Georgia and Nigeria to its member list (see here). OECD reports that the pressure has been kept up on the global fight against tax evasion. The updates are available here.

If a foreign company is liable to tax in India, even if not actually paying tax, has to necessarily file a return u/s 139(1): AAR

Also held:

The transfer pricing provisions from section 92 to 92F of the Act not attracted when sale and purchase of shares between non- resident companies.

VNU International v. Director of Income Tax, 28^th March, 2011

AAR No. 871 of 2010

Relevant Facts:

1. The applicant states that it is a tax resident of the Netherlands and does not have any permanent establishment in India.

2. The applicant first transferred 50% of shares it held in ORG-IMS, a company incorporated in India to IMS-AG, a company incorporated in Switzerland. After the transfer, the applicant was left with 50,765 shares of ORG-IMS, amounting to 50% of the total shares.

3. In a subsequent SPA, the applicant transferred 50% of the shares (50,765 shares) to IMS-AG & Interstatistik AG for a total consideration of ` 74,08,643. The shares were acquired for a consideration of ` 4,61,500.

Questions for consideration:

1. On the facts and circumstances of the case, whether any capital gain earned by VNU International on transfer of 50,765 shares of ORG-IMS to the purchasers would be liable to tax in India as per the provisions of the Act and the Tax Treaty between India and the Netherlands?

2. On the facts and circumstances of the case, if the capital gain is not taxable in India, whether the applicant is required to file any return of income under section 139 of the Act?

3. On the facts and circumstances of the case, whether the transfer of shares by the applicant to IMS AG attracts the transfer pricing provisions of section 92 to 92F of the Act?

4. On the facts and circumstances of the case, whether IMS AG were liable to withhold taxes under section 195 of the Act and if so, on what amount would the tax have to be deducted?

Partly upholding the application of the applicant, the Hon’ble Court held that:

Para 7: “ Transfer pricing provisions from section 92 to 92F of the Act would not be attracted as the sale and purchase of shares is between non- resident companies of the Netherland and Switzerland. Since there is no income chargeable to tax, there would be no liability to deduct tax u/s.195 of the Act.”

Para 8: “We are in agreement with the Learned Advocate that the capital gains earned by the applicant on transfer of shares would be covered by Article 13(5) of the Tax Treaty and shall be taxable only in the Netherlands, the state in which the transferor is a resident.”

Para 13: “...Then, as per the third proviso, every company is required to file its return of income, whether it has an income or a loss. The applicant being a foreign company, is covered within the definition of a company under section 2(17) of the Act. The applicant does not dispute that the income arising from the sale of shares is liable to be taxed in India by virtue of section 5(2) of the Act, though no tax is actually paid in India. It is a different matter that by virtue of DTAA the applicant is actually paying tax in the Netherlands. If the power to tax be granted it is difficult to appreciate the argument that when the resulting income is nil, there is no obligation to file return of income. It may be mentioned that where it is not necessary for a non- resident to furnish return under section 139(1) of the Act, the statue has specifically provided, as is the case under section 115AC(4) of the Act. Apart, it is necessary to have all the facts connected with the question on which the ruling is sought or is proposed to be sought in a vide amplitude by way of a return of income than alone by way of an application seeking advance ruling in Form 34C under IT Rules 1962. Instead of causing inconvenience to the applicant, the process of filing of return would facilitate the applicant in all future interactions with the Income tax department.”

The decision is available here.

OECD Updates

The OECD has come up with the following:

1. The Transfer Pricing of Intangibles: Scope of the OECD Project on 25th January, 2011. The document can be found here. The cases in India relating to Intangibles have been very limited in number till now.

2. The Global Forum on Transparency and Exchange of Information for Tax purposes, hosted by the OECD have found that the tax laws in some jurisdictions do not meet Global Standards.

The jurisdictions are: Barbados, the Seychelles, San Marino, Trinidad and Tobago, Australia, Denmark, Ireland, Norway and Mauritius

A synopsis of the findings are available here.

Delhi ITAT: Comparables having super-normal profits to be excluded from forming basis for Transfer Pricing

Adobe Systems India Private Ltd. v. ACIT, on 21^st January, 2011

Assessment Year: 2006-07

Question/s before the Hon’ble Tribunal: Whether the comparables to be used under transfer pricing can be ones using super-normal profits?

Relevant facts: The TPO in this case passed a Transfer Pricing order making a upward adjustment of ` 10,40,75,727/- on the arms length price of the international transactions. The TPO did so by rejecting some of the comparables used by the assessee and added some more comparables which the assessee had objected.

Upholding the appeal of the assessee, the Hon’ble Tribunal held that:

Para 5: “It is undisputed that these three companies have shown supernormal comparable profits as compared to the other comparable. There exclusion from the list of comparable is quite correct. By excluding these three companies from the comparables and showing the computation on the basis of TPO data the arithmetic mean of OP/OC to 17.15% which falls within the +-5% range as permitted by section 92(C)(2). Hence, we find considerable cogency in the arguments of the ld. counsel of the assessee in this regard.”

The decision is available here.

Visakhapatnam ITAT: The +/-5% benefit is not applicable to Arms Length Pricing done on a single appropriate method

ACIT v. Essar Steel Ltd., on 25^th January, 2011

Assessment Year: 2004-05

Question/s before the Hon’ble Tribunal:

(1) Whether the benefit of proviso to section 92C(2) (relating to +/-5% adjustment) applies on a single price determination or only upon determination of arithmetic mean of two or more prices?

(2) Whether the Circular No.12 dated 23.8.2001 issued by the CBDT will have application for the year under consideration over the proviso to sec. 92C(2), as amended by the Finance Act 2002?

Relevant facts: During the year under consideration, the assessee had entered into two types of international transactions viz., Commission payments and Sales to its Associated Enterprise (AE) located abroad. The assessing officer referred the matter of determination of Arms Length Price (ALP) in respect of these International transactions to the Transfer Pricing Officer (TPO) in accordance with sec. 92CA of the Act. The TPO expressed the view that the Commission Payments do not require any adjustment. However, in respect of sales effected to the AE, the TPO determined the ALP of the sale transactions at Rs.67,20,03,342/- as against sales value of Rs.66,08,35,225/- declared by the assessee, thus resulting in a difference (enhancement) of Rs.1,11,68,115/-. The assessing officer accepted the ALP so determined by the TPO and accordingly added the difference cited above to the total income of the assessee (1.69% difference).

Upholding the appeal of the revenue, the Hon’ble Tribunal held that:

Para 9: “There appears to be no dispute with regard to the fact that the amended proviso to sec. 92C(2) shall have application only if more than one price is determined by the most appropriate method.”

Para 15: “It can be noticed that the Circular No.12 of 2001 was issued only to explain the amendments made by the Finance Act 2001, which never came into operation.”

Para 16: “Now the question that arises is whether an assessee could place his reliance on a circular issued for explaining certain provisions, which never came into operation…In the instant case, the proviso, for which the Circular no.12, (Supra) was issued, has never come into operation and hence the question of the administration of the said provo(sic) to sec. 92C(2) does not arise at all. In view of the subsequent amendment brought in by Finance Act, 2002, the said circular has become otiose. In view of the above, we are of the view that the assessee could not place reliance on the Circular no.12 and for the year under consideration, only the proviso to sec. 92C(2), as amended by Finance Act 2002 is applicable. In that case, the said proviso shall apply only if the “most appropriate method” results in more than one price, in which case the arithmetical mean of such prices shall be taken as the ALP. However, the assessee shall have an option to adopt a price which may vary from the arithmetical mean by an amount not exceeding five percent of such arithmetical mean.”

Para 16(sic): “In the instant case, only one price has been determined under “Most appropriate method”. Hence, in our view, the question of application of the proviso does not arise.”

The decision is available here.