In Doshi
Accounting Services vs. DCIT, the Special Bench of the ITAT
has held that the transfer pricing provisions are applicable even to a case in
which the income of the assessee is eligible for 100% tax exemption and is not
chargeable to tax in India.
1. Introduction
Recently, the Hon’ble President
of the Income Tax Appellate tribunal (ITAT) on a
reference made by a Division Bench constituted a Special Bench to decide the
following question of law :
“Whether
or not the provisions of Section 92 can be invoked in a situation in which
income of the assessee is eligible for tax exemption or tax holiday and thus
not actually chargeable to tax in India, or in a situation in which there
cannot be any motive in manipulating the prices at which international
transactions have been entered into?”
To
understand the decision passed by the Special Bench, it is imperative to
analyse the facts, orders of the lower authorities and contention placed by
both the parties before the Special Bench. The article aims at a deep dive into
the decision, addressing the vital issues and encapsulating the decision in a
compact version.
2. Facts
Doshi Accounting Services Private Limited (assessee)
is a private limited company, engaged in the activity of business process
outsourcing (BPO)services in the field related to accounting & taxation
such as book-keeping, VAT, returns, payroll, management accounting, and audit.
The major shareholder in thecompany is Mr. Dhiren Doshi, who is also the sole
proprietor of the firm M/s Doshi& Co. (AE (2) )
based in the United Kingdom.
The assessee provides these services from the unit
situated at Baroda which isaSoftware Technology Parks of India (STPI) unit
eligible for deduction/exemption under section 10A of the Income Tax Act, 1961 (Act).
The assessee in the year under consideration (3) provided
services equating to1,60,378 hours to its AE and 380 hours services provided to
NON-AEs located in Zambia, Africa. The assessee in the year under consideration
in the case of AE has charged a rate of GBP 5 per hour from April 2005 to Feb
2006 and in March at the rate of GBP 6 per hour whereas in case of non-AEs it
has charged GBP 4.50 to 4.85per hour during the same period. Accordingly, the
assessee contended that the similar nature of services was provided to both AE
and non-AEs from the same facility, but the rate charged to the AE was higher
than the average rate charged to NON-AEs.
The assessee benchmarked its transaction with AE
by applying internal comparable uncontrolled price (CUP) method
prescribed under section 92C of the Act and claimed that its transactions with
theAE are at Arm Length Price (ALP).
3.
Proceedings before the Ld. Assessing Officer (Ld. AO)
The
assessee during the assessment proceedings made available the details of the
external comparables based upon the quotations of Independent Enterprises where
the average rate quoted by them figuring at GBP 5.71 per hour was greater than
the rate charged from the AE. The assessee contended that difference in the
rates arrived in pursuing internal CUP method being GBP 5.09 and external CUP
method being GBP 5.71, arose due to the unevenness of the terms and conditions
between the subject entities and their clients.
On the other hand, the Ld. Transfer Pricing
Officer (TPO) rebutted
the rationale proffered by the assessee and was of the view that CUP method
requires a high degree of comparability such as the volume, credit terms,
timing & geographical area of transaction/services, etc. which is not
comparable in the present case, thereby adopting Transactional net margin
method (TNMM) as the
most appropriate method. Accordingly, theTPO made the upward adjustment of INR
1,48,23,848.
4.
Proceedings before the Ld. Dispute Resolution Panel (Ld. DRP)
Aggrieved by the order of Ld. TPO/Ld. AO, assessee
referred the matter to Ld. DRP. The assessee placed a contention before the Ld.
DRP that the assessee is enjoying the benefit of deduction under section 10A of
the Act i.e. exemption on its eligible profit at the rate of hundred percent,
therefore there is no reason for the assessee to charge a lower price from its
AE. Moreover, the assessee contended that the effective tax rate in the UK
would be higher than the effective tax rate in India, thus there was no motive
and incentive in shifting the profits from India to the UK, where the rate of
tax is comparatively higher. The assessee in support of their contention placed
its reliance on the decision of the Hon’ble ITAT (Bangalore Bench) in the case
of Philip
Software Pvt. Ltd. (4)
However, the Ld. DRP rejected the contention of
the assessee after relying on the decision of Hon’ble ITAT (Bangalore 5-member
Special Bench) in the case of Aztec software & technology
services Ltd and
Hon’ble ITAT (Mumbai Bench) in case of Gharda chemicals Ltd. (6)
5.
Appeal before the ITAT
Aggrieved
by the order of Ld. DRP, the assessee is in appeal before ITAT (Ahmedabad
Bench). The assessee took the plea that since, it is eligible for tax exemption
and not actually chargeable to tax in India, therefore there cannot be any
motive to shift the profit from India to U.K. Therefore, no reference to the
Ld. TPO ought to have been made.
The
Bench found contradictory orders of the ITAT on the above plea and therefore,
recommended the question for determination by the Special Bench.
6.
Proceedings before the Special Bench
A
Special Bench was constituted to examine the above-mentioned issue.
6.1.
Contentions placed by the Assessee
The
assessee placed 5 contentions before the Special Bench viz.
(a) Purposive of interpretation of Transfer
Pricing (TP)provisions.
(b) Purpose
of introducing TP provisions.
(c) Why the Decision of the ITAT (Bangalore
5-member Special Bench) in the case of Aztec Software & Technology
Services Ltd. (7) is
no more a good law.
(d) Income is sine qua non to
apply the provisions of Chapter X of the Act.
(e) other arguments in support of this
interpretation.
Elaborating
the above-mentioned contentions placed by the assessee as follows:
(a)
& (b) Purposive of interpretation & Purpose of TP provisions
That the TP regulations in Chapter x of the Act
were introduced via amendments in Finance Act, 2001 and 2002. The then Hon’ble
Finance Minister had explained (8) that
since participation of multinational group companies in the economic activities
of the country has arisen, and new complex issues have emerged from the
transactions entered between two or more enterprises belonging to the same
multinational group, therefore, possibility of manipulation of price charged or
paid as such in their group concerns, cannot be ruled out, and can lead to
erosion of tax revenue to the country. With a view to provide statutory
framework, which can lead to computation of reasonable, fair and equitable
profits and tax in India, in the cases of such multi-national enterprises, new
provisions were introduced in the Income Tax Act.
Further reliance was placed on numerous Circulars
viz. 12 of 2001 dated August 23, 2001 (9),
Circular No.14 of 2001 (10) ,
and Circular No. 8 of 2002 dated August 27, 2002 (11) to
contend that TP provisions have been incorporated with a view to provide a
statutory framework to prevent profit shifting from India leading to erosion of
tax revenue. Reliance to this effect was placed on the decision of the Hon’ble
Supreme Court in the case of Morgan Stanley & Co. (12)
Since,
the assessee was eligible for exemption under section 10A of the Act on its
eligible profit at the rate of hundred percent, therefore, there is no chance
of avoidance of any taxes, hence the provisions of Chapter X i.e. TP Provisions
should not be attracted.
For the purpose of applying the rule of reasonable
interpretation, reliance was placed on decisions of the Hon’ble Supreme Court
in the case of Goodyear India Ltd . and Allied Motors P.Ltd. )
The decision of the ITAT (Bangalore 5-member
Special Bench) in the case of Aztec Software & Technology
Services Ltd where on a similar issue the question has been
decided in the favour of the revenue has been expressly over ruled by the
decision of the Bombay High Court in the case of Vodafone India Services P. Ltd.
(d)
Income is sine qua non to apply the provisions of Chapter X of the Act.
That, the Ld. AO ought to have not made reference
blindly to the TPO for determination of ALP of international transaction, as prima
facie it is evident that there is no element of income or loss
involved in such transaction.
Further,
that Chapter X of the Act is a machinery provisions and not a charging one.
Once the income of the assessee is eligible for hundred percent deduction under
section 10A of the Act then by applying the machinery provision an artificial
chargeabilty cannot be invoked.
(e)
other arguments in support of this interpretation
That,
sections 10A/10B/10AA of the Act and the TP provisions operate in separate and
mutually exclusive sphere. On plain reading of these provisions, it would
reveal that neither supersede nor overrule the other one. There is no
legislative or judicial clarity as to which will prevail over the other.
In order
to determine eligible business for the purpose of computing eligible profits
under section 10 A of the Act, the Legislature have put various restrictions
i.e. section 80IA (8) and (10) which have been made applicable to section 10A
of the Act.
Under
this section wherein it has been contemplated that value of all goods and
services undertaken by any assessee from the eligible business should
correspond equivalent to the market value. The expression “market value” used
in section (8) has been explained by way of an explanation. According to this
explanation, the expression “market value” in relation to any goods and
services means the price that such goods or services would ordinarily fetch in
the market. After Assessment Year 2013-14, the scope of expression “market
value” used in sub-section(8) has been enhanced and it has been provided that it
should be at an arm’s length price as defined in clause (ii) of section 92F
where the transfer of such goods or services is a specified domestic
transaction referred to in section 92BA.
Thus section 10A is a complete code in itself,
which authorise the AO to determine the eligible profit for grant of exemption
at the rates specified in section. It takes care of any unreasonable profit if
computed by the assessee.
Further since none of the provisions starts with non
obstante clause exhibiting the overriding effect given to any of
the provisions, then section 10A of the Act being substantive provisions
provide incentive from taxation and also a machinery provisions providing the
mode of computation, it should be given preference over the TP provisions.
Therefore, once it is held that the assessee is
entitled for hundred percent exemption of its profit under section 10A, then TP
provision ought not to be applied. Reliance was placed upon the decision of
Hon’ble Karnataka High Court in the case of Hewlett Packard Global Soft Ltd (17) .
Further on the strength of Hon’ble Supreme Court
decision in the case of Bajaj Tempo Ltd. (18) ,
it was submitted that section 10A of the Act being a provision intended to
promote for economic growth it should be construed liberally with an idea to
achieve both these sections and not to frustrate such objects.
Pursuant to that another contention was placed on
clause (4) of Article 26 of the Indo-UK DTA; India cannot subject the assessee
to taxation or requirements more onerous than the similar enterprises in India.
In other words, tax authorities in India cannot discriminate between the
assessee vis-Ã -vis an
identical assessee situated in India dealing with identical transaction to
other residents in India. The fact that when an eligible unit under section 10A
of the Act transacts with a related resident, the only action that can be taken
is to deduce profit as per section80IA(8) and (10) of the Act. However, when an
eligible unit under section 10 of the Act transacts with a related
non-resident, its profit can be re-determined, reduced as per 80IA(10) of the
Act, and the transaction price can also be replaced and theassessee’s income
enhanced under the TP provisions. Section 92C(4) of the Act wherein it has been
provided that if there is an upward adjustment in the ALP of an international
transaction, then deduction under section 10A of the Act will not be granted on
such adjustment. This creates a discrimination between the resident vis-Ã -vis
non-resident and in view of Article26 of Indo-UK DTA. Reference was made to the
decision of Hon’ble Delhi High Court in the case of Herbalife International India
P. Ltd .
6.2.
Contentions placed by the Department
That the
literal interpretation of section 92C(4) of the Act is unambiguous in the
interpretation of the provisions of the law, and there is no need to take any
aid from the rule of the interpretation.
That,
there are incomes which are chargeable to tax, albeit they do not form part of
the total income as understood under section 4 read with section 5 of the Act.
These Incomes are specified under section 158BA read with section 113 of the
Act, section 68 read with section 115BBE of the Act. Similarly, when the
proviso to section 92C(4) of the Act comes into play resulting in a
disallowance out of the exempted part of income, allowed under section 10A of
the Act, will be subject to tax.
Further, the facts of Vodafone India Services P. Ltd are distinguished from the current case
and that the precedent should not impact the invocation of Chapter X of the
Act.
Further,
that the notional/book adjustment on account of the transfer pricing
provisions. As such, there will not be any inflow of the foreign currency even
whenthe exemption is denied by virtue of the proviso to section 92C of the Act.
6.3.
Order of the Special Bench
The
Special Bench relying on a catena of decision of both the Hon’ble Supreme Court
and various Hon’ble High Courts held that it is cardinal rule of interpretation
that where the language used by the legislature is clear and unambiguous then
plain and natural meaning of those words should be applied to the language and
resort to any rule of interpretation to unfold intentions is permissible where
the language is ambiguous.
Section
92C of the Act has a direct bearing on the controversy on hand, perusal of the
same makes it clear that it is very clear 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. On the other hand, 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 under section 10A of the Act on the income to the
extent enhanced as an effect of a determination of ALP.
Provisio
to section 92C(4) vividly reflects the intent of lawmakers that the provisions
of chapter X of the Act shall prevail in all the cases of international
transactions falling under the umbrella of section 92 of the Act including the
income-qualified for exemption under section 10A of the Act.
Thus sections 92 of the Act is clear, unambiguous,
and do not lead to any absurd meaning. Further regarding the budget speech
& memorandum explaining the provisions, it is also a settled legal position
that headings or marginal notes do not govern a provision where the legislature
has used plain and unambiguous language. It is when the language is equivocal
only then, help can be taken from the circulars, marginal notes or the Finance
Minister speech or memorandum explaining the provisions to interpret the
provision of the Act. Reliance is placed on the decision of the Hon’ble Supreme
Court in the case of Anandji Haridas& Co. Pvt.
Ltd vs. Engineering Mazdoor Sangh & Anr (21)
Further, that department Circulars as mentioned by
the assessee are not binding on the Tribunal and circulars cannot be used to
usurp the power of a judicial body while exercising its jurisdiction, including
interpreting the statutory provisions. Reliance is placed on the decision of
the Hon’ble Supreme Court in the case of Sanjeev coke manufacturing
company vs. Bharat coking coal Ltd and another
Further,
the spirit behind introducing section 10A of the Act was to bring foreign
exchange in India. Granting exemption from Tax under section 10Aof the Act was
incidental and not the main object. Furthermore, where amount fetched by the
Indian AE as revenue and/or the amount paid to its counter-part,AE outside
India, as expenditure is lower and higher respectively and does not correspond
to an ALP, the same will adversely affect the inflow of foreign exchange in
India, and that could be one of the reason to insert the proviso in section
92C(4) of the Act.
For
example, assessee though claiming the exemption under section10A of the Act can
also manipulate the ALP with an objective to avoid corporate dividend tax by
shifting its profits to AE. This also might be the reason for inserting a
proviso to section 92C(4) of the Act.
Further,
with regard to whether the tax levied in pursuance of the provisions laid down
in article 265 of the constitution of India can be the subjected to foreign tax
laws. Reliance is placed on OECD guidelines which states that the arm’s length
principle promotes the growth of international trade and investment amongst
OECD member countries and other countries. to maintain harmony and avoid double
taxation, there have been made various treaties with different countries under
section 90 of the Act. Thus, the taxes levied under Article 265 of the
constitution of India will be subject to such treaties which do not even
connote being subject to foreign tax law.
The
provisions of Chapter X of the Act 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, even if an assessee is eligible for tax exemption at the rate of
hundred percent under section 10A/10Bof the Act, even then the arm’s length
price on international transactions deserve to be determined under section 92C
of the Act.
7. Our
Views
Appreciating
the decision of the Special Bench, especially where the Bench has examined the
possible impact on corporate dividend tax on manipulation of ALP.
However, since the Bench relied heavily on literal
interpretation of the statutes. They ought to have provided further
clarification in the event the assessee would have been located in a SEZ or the
free trade zone was converted into an SEZ. Section 51(1) of The Special
Economic Zones Act, 2005 (SEZ Act) gives
an overriding provision over other laws.
The rule of generalia specialibus non
derogantit is a well settled position in law. i.e. the provisions
of a general statute must yield to those of a special one. The same has been
upheld by the Hon’ble Supreme Court in the case of India Fisheries wherein it was held that If there is an
apparent conflict between two independent provisions of law,
the special provision must prevail.
Section
51(1) of the SEZ Act is usefully extracted as under:
“51(1)
The provisions of this Act shall have effect notwithstanding anything
inconsistent, therewith contained in any
other law for the time being in force or in any instrument having effect by virtue of any law
other than this Act.”
(Emphasis supplied)
(Emphasis supplied)
The
reading of the provisions expressly clarifies that the provisions as specified
under The Special Economic Zones Act, 2005 would have overriding effect on the
Income Tax Act, 1961, because Special Economic Zone Act, 2005 is a Special Act
and a later Act of the Parliament.
Would
the question of law before the Special Bench be answered differently in this
case?
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