IT
Act- ChAPTER X vs sec 40 A (2)
( OR sec, 37 (1) !)
( OR sec, 37 (1) !)
PROLOGUE
The recently delivered ITAT Order in Taegu Tec India Pvt. Ltd. vs Dy. CIT, Bangalore (the instant case) reported @ https://indiankanoon.org/doc/163423622/ makes for an interesting reading; therefore, is chosen for a study, and critical analysis. .
Briefly stated: This is an instance, rather the latest one in a series of such instances, in which the assessee has been denied its claim for deduction of a payment made to a foreign enterprise, by resort to the TRANSFER PRICING REGULATIONS (TRP). The claim has been disallowed by the AO, and upheld in the first, and then, in second appeal as well; but, on the only ground that the assessee has failed to prove, with evidence, that the payment represents consideration for services actually rendered by the foreign enterprise. The point of issue /controversy stems principally on the fact that the disallowance has been made, by invoking the provisions of Chapter X, - in which are embodied the so called “Transfer Pricing Regulations” (TRP). Albeit, according to a better, rather right view, if at all, the admissibility or otherwise of the said claim of expenditure should have been examined and decided having regard to the appropriately applicable sec 40A (2); or, perhaps, the more appropriate provision of sec 37
The matter of dispute, therefore, necessitates a close study and independent understanding of the relevant scheme of Chapter X.
ASIDE:
The facts and circumstances of the case, and the submissions made, respectively
by both the parties to the dispute, may be found to have been set out in
paragraphs 3, 4,and 5 of the Order. In paragraph 6, the case law cited and relied on by the
assessee – appellant’s counsel have been narrated, For the ITAT’s observations , its findings and the
grounds of the decision, the succeeding paragraphs may have to be looked
through.
For the discussion herein, in view of the intended limited scope, extracts of only such portions of the Order as are considered of the utmost importance and relevance are furnished below:
“2. The appellant raised the following grounds of appeal: “ (?)
(Paragraph
2. abruptly ends; and, what are the precise grounds of appeal raised . are not
stated, but left blank. No guess why so?)
“8. Therefore WHAT FOLLOWS FROM THE ABOVE DECISION IS THAT THE ALP OF THE MANAGEMENT SERVICES FEE CANNOT BE DETERMINED AT NIL BY QUESTIONING THE NECESSITY OR THE BENEFITS OUT OF THE EXPENDITURE INCURRED. But onus lies on the assessee to furnish the proof of actual receipt of the services by the appellant from the AE. ………………..The coordinate bench of this Tribunal in the case of Volvo India Pvt. Ltd., of which the Hon'ble AM is the author, held as follows:
"12. THUS IN THE LIGHT OF THE ABOVE LEGAL POSITION, THE ALP OF SERVICES OF AE CANNOT BE DETERMINED AT NIL BY QUESTIONING THE NECESSITY OF BENEFITS OF EXPENDITURE INCURRED. BUT THE MATTER DOES NOT END THERE. THE ONUS LIES ON THE ASSESSEE TO PROVE THAT THE SERVICES ARE ACTUALLY RENDERED BY THE AE. But the assessee had failed to discharge this onus lying upon it despite being asked to do so by the TPO. ………………Furthermore the finding of the TPO that the invoice was raised much after the closure of the accounting year and the payment of management fee in nothing but siphoning of the profits from India with the intention of avoiding tax are serious enough to doubt the genuineness of transactions. The appellant had made no effort to controvert the findings of the TPO. Therefore, in our considered opinion the TPO/AO is justified in adopting ALP at Nil."
9. Respectively following the decision of co-ordinate bench cited supra, we hold that in the absence of proof of actual rendition of services on record, TPO was justified in making the ALP adjustment of Rs. 2,21,64,344/-.
10. As regards the other contention of the AR that the transaction of management support fee should be aggregated with other transaction and be bench marked by adopting TNMM cannot be accepted for the simple reason that when there was no proof of actual rendition of services by AE, the very transaction is a sham transaction and in which event it cannot be said that the transaction can be bundled with other transactions.
11. In the result appeal filed by the assessee is dismissed. “
…….
3.
TRANSFER PRICING REGULATIONS (TPR)
Chapter X of the IT Act, titled - Special Provisions Relating to
Avoidance of Tax- are embodied in sections 92 to 92F; and the Rules there
under.
The special features of the TPR, in so far as they are of relevance for
the discussion herein, may be summed up as under:—
The ‘enterprise’ is a party to an ‘international transaction’;
The income arises from the international transaction;
The
referred transaction is one entered into by the non-resident
enterprise with one or more other
‘enterprises’, whether a resident or
non-resident;
the
enterprise whose income is to be taxed is an ‘associated enterprise’ in
relation to the other enterprise(s) who is a party to the referred transaction.
The terms - ‘enterprise’, ‘international
transaction’, and ‘associated enterprises’
are, for the above purpose, specially
defined, and have to be necessarily taken
to mean and be understood accordingly.
In a given case, only if the specified conditions are
satisfied, the Assessing
Officer is required to compute the income arising from the
international
transaction having regard to the ‘arm’s length price’. For
this purpose, the term
‘arms length price’, as defined, in essence, means a price
that would have
been charged had the
transaction been between two independent enterprises
dealing with each other, as determined by market forces.
There are elaborate provisions made as to how to determine the arm’s
length price. They prescribe the methods, and the arm’s length price is
required to be adopted depending upon which is the most appropriate one among
them, having regard to the nature of the transaction, or class of transactions,
or class of associated persons, or functions performed by them, or such other
relevant factors as the Board may prescribe. The methods prescribed/enumerated,
besides any other method if and when prescribed by the Board, are:- comparable
uncontrolled price method, resale price method, cost plus method, profit
split method, and transactional net margin method. It is further provided that,
where more than one price may be determined by the most appropriate method (of
the prescribed five methods), the arm’s length price shall be taken to be the
arithmetical mean of such prices. As, in any case, for taxing profits or income
from any transaction the deductible expenses (including interest expense) have
to be necessarily taken into account/entered in the computation, by way of
matching like for the like, it is provided that the deductions for such
expenses also shall be determined having regard to their arm’s length price.
For ready reference and appreciation, section 92, being the main and
controlling section reads:
"92. Computation of income from international transaction
having regard to arm’s length price.—
(1) ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION shall be
computed having regard to the arm’s length price.
Explanation.—For the
removal of doubts, it is hereby clarified that the allowance for any expense or
interest arising from an international transaction SHALL ALSO BE DETERMINED
HAVING REGARD TO THE ARM’S LENGTH PRICE.
(2)……
(3) THE PROVISIONS OF THIS SECTION SHALL NOT APPLY IN A CASE WHERE THE
COMPUTATION OF INCOME UNDER SUB-SECTION (1) OR THE DETERMINATION OF THE
ALLOWANCE FOR ANY EXPENSE OR INTEREST UNDER THAT SUB-SECTION, or the
determination of any cost or expense allocated or apportioned, or, as the case
may be, contributed under sub-section (2), HAS THE EFFECT OF REDUCING THE
INCOME CHARGEABLE TO TAX OR INCREASING THE LOSS, AS THE CASE MAY BE, COMPUTED
ON THE BASIS OF ENTRIES MADE IN THE BOOKS OF ACCOUNT IN RESPECT OF THE PREVIOUS
YEAR IN WHICH THE INTERNATIONAL TRANSACTION WAS ENTERED INTO." (FONT
supplied)
4. OWN OBSERVATIONS/ VIEWPOINTS
(A) Why the
scheme of TPR could, at all, conceivably be invoked and aptly applied to the
given case is unclear; rather, suffers from a faulty logic. Especially so, as according to the AO , so also the TPO ,
the PRICE ('management fees') for the TRANSFER OF SERVICES BY THE FOREIGN ENTERPRISE(S)
charged to, and paid for by, the Indian
entity has to be taken at a 'nil' figure. And, that is the only ground for
disallowing the claim ; not on the basis of ‘arms length price’ . To be
specially noted, - in doing so, the TPO did not have to, and in fact, had no scope hence not applied
or gone through the procedure envisaged by the TPR for determination of ‘arms length price’.
For a proper and
intimate understanding of the scheme of TPR, essentially for an appreciation in
proper light of the obvious intricacies thereof, recommend to go through and
bear in mind the Experts' commentary on the subject scheme - say, in
Palkhivala's leading Text Book , Vol II, Ninth Edition.; in particular, the experts’
commentary under the relevant crucial heads, at pages 1535 to 1539.
(B) Also may read the ITAT Order in re. Aztec Software & Technology Services Ltd. ; and mindfully go through the critique thereof vide the published article - (2007) 165 TAXMAN pg. 165.
In that case, the Tribunal had rejected the assessee’s primary contention,
on the ground of its following observations:
"Section
40A has overriding effect over the provisions relating to the computation of
income under the head ‘Profits and gains of business or profession’. That
means, it has overriding effect over the provisions contained in Chapter IV-D, i.e.,
sections 28 to 44DA only. HENCE, THE PROVISIONS OF SECTION 40A (2) WOULD NOT
AND CANNOT OVERRIDE THE PROVISIONS CONTAINED IN CHAPTER X OF THE ACT. Even
otherwise, if there are different provisions over the same subject, then, in
law, the specific provisions would prevail. So, even assuming that provisions
of section 40A are attracted, these are the general provisions applicable to
all transactions while the provisions of Chapter X are specific provisions
relating to international transactions only. Therefore, the provisions of
Chapter X which are more specific would apply to the instant case."
It is thus seen that the Tribunal had proceeded on the premise and
basis of its conviction that even ‘expenditure’, because of its arising from an
international transaction, is, same way as ‘income’, liable to be processed as
per the special provisions of the Act. The rationale behind such a view, to put
it mildly, apparently deserves a re-examination/review.
Be that as it may, in any view, even according to the observations and
the case law cited and approved of by the ITAT in the instant case (see the
highlighted portion of paragraph 8., above) the reasoning given for applying
the TRP, not the appropriate sec 40A (2), better sec 37 (1), is, to say the
least, not logically sound and sustainable. For that matter, the TRP would be
within his powers only had he to follow, and in a given case strictly followed, both in letter and spirit, as mandated, the procedure
laid down in the Act; to be precise, the ‘nil’ transfer has not been arrived at
by him by applying any of the standards/methods for evaluation of ‘trp’; as, on the stated premise/stance taken by the AO, that would have been a non-starter, in any case.
(C) Importance of
properly formulated ‘grounds’ /’propositions’ for judicious Adjudcation:
As observed herein before (ref. Paragraph 2 of the ITAT Order), the
‘grounds of appeal’- that is the specific propositions - addressed for
consideration, are not found stated; as such, no knowing what exactly those
were or how had been formulated. Be that as it may, the crucial point to be
noted and emphasized is this: Without propositions
aptly formulated and eminently framed and presented, - which is essential for
enabling the ITAT (or Court) to keep in focus, it is most likely to prove
unhelpful for a proper appreciation of the real issues calling for
adjudication.
To illustrate: Attention may be invited to an instance as covered in a
HC Judgment; and the published critique thereof vide [2006]156 TAXMAN 121 (ART).
In that case, the point of dispute was
taken up in reference to the High Court by the Revenue. The question as framed
by the Revenue read :
"Whether, on the facts and in the
circumstances of the case, the Tribunal was right in law in holding that the
foreign currency of Rs. 4,56,980 confiscated by the customs authorities
from the assessee should be allowed as a loss to the assessee while assessing
the same as unexplained income of the assessee under section 69A, in view of
the fact that the source of such foreign currency has not been explained, as a
result of which the income is assessable under the head ‘Other sources’ and not
under the head ‘Business or profession’ and further, the loss of the amount due
to the confiscation being in the nature of personal loss is not eligible for
set off?" (p. 648)
However, the Tribunal, on its own,
chose to and re-framed the question and referred it to the High Court as under:
"Whether, the foreign currency of
Rs. 4,56,980 confiscated from the assessee was allowable as a loss to the
assessee." (p. 648)
The referred question, as may be
observed, was, in comparison with the comprehensive question as proposed by the
Revenue, so brief that it had omitted to bring to focus all such relevant
points as required for the Court to give a well-considered and proper opinion.
The Tribunal had obviously failed to appreciate that despite the old proverb -
Brevity is the soul of wit, in matters of law, especially in court proceedings,
brevity at the cost of clarity may result in an unintended or undesirable
consequence. That it actually turned out to be so is borne out by the fact
that, in the Court’s judgment, in answering the referred question, the relevant
section 69A was not considered.
A) On the aspect as to why sec 37 (1) , not sec 40 (A) (2), would have been the more appropriate provision to have been applied : Sec 40 (A) (2) is, in terms, applicable, provided the issue for decision/adjudication is whether dispute, in a given case, of the claim for deduction of any expenditure, is founded on the AO's opinion that such expenditure is EXCESSIVE OR UNREASONABLE having regard to the FAIR MARKET VALUE of the goods or services, facilities for which the payment is made or......" (FONT supplied)
In the instant case, however, according to the AO, his opinion is different; in that, assessee has not proved, with evidence, that the payment is for services actually rendered and therefore, the entire payment is not admissible.
ASIDE
Cross Refer >
B) The stakes involved are too high and significant. Hence, the assessee –appellant is most likely to decide to, pursue the issue (s) by taking on in further proceedings. For that purpose, to help in suitably framing the propositions, and successfully addressing the issues for adjudication, the line of reasoning canvassed for, and the viewpoints stressed, in the under mentioned published articles, it is suggested, may be looked through:
Tax Treaties v. Transfer Pricing (2007) 10 CAT pg. 535
ITAT on Transfer Pricing Regulations (2007) 165
TAXMAN pg. 165
In Re. Cargill India ((P) Ltd. (2008) 301 ITR pg. 13 (Journal)
Tax Treaties v Transfer Pricing (2008) 172 TAXMAN pg. 49 (Mag.)TAIL Note: Related HERE >
Page 1 of 61 ITA No.1413/Bang/2010 1 INCOME TAX ... - itatonline.org
Disclaimer: The analytical
study undertaken herein, for satisfying nothing else but own academic interest,
is mainly with a view to having one’s own thoughts cleared; and, only
incidentally, for sharing with equally interested others own viewpoints. The
object is to thereby try and stimulate ideas and thoughts, that hopefully will
help others in aiming at an independent contribution of some value in its true
sense ; but altruistically for the common good in its profound sense.
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