India: The Tribunal Ruled Out That Scenarios Wherein The Arm's Length Price Determination Of The International Transactions Results In Decline In The Indian Tax Base, The Indian Transfer Pricing Provisions Are Not Applicable In Such Instances
Cummins Inc. ["the taxpayer"] is a foreign company,
rendering services in respect of desktop/laptop software license
and internet mail facilities to its Indian associated enterprises
("AEs"), i.e. CIL and CSSL which were paying IT charges
provided by the taxpayer.
During assessment year under review, the Transfer Pricing
Officer ("TPO") determined the arm's length price of
the aforesaid receipts of the taxpayer based on the method of cost
allocation using actual costs. The In this regard, the taxpayer was
of the view that allocation of costs based on cost estimates is an
accepted allocation mechanism by OECD TP Guidelines and the
additions made by TPO would result in deterioration of overall
India tax base. The TPO while making aforesaid addition, also
ignored the fact that the percentage variation in cost estimates
and cost variations were not material and the same less than 5% as
provided in under section 92C of Income-tax Act, 1961 ("the
Act"). The Commissioner of Income tax Appeal ("CIT
[A]") confirmed the additions made by TPO. In view of the
same, the taxpayer is in appeal before the Income-tax Appellate
Tribunal ("the ITAT"/ "the Tribunal").
Ruling of the Tribunal
During course of proceedings, following was observed by the
No adjustment can be made in
case of reduction of tax base in India
The Tribunal stated that the addition made by the TPO by using
actual cost method dictated to recover more from the Indian
concerns. Alternatively, the taxpayer recovering more money from
its Indian AEs would result in reducing the overall tax base of
India which eventually would result in violation of the provision
of Section 92(3) of the Act. Based thereon, the Tribunal reversed
the order of CIT(A) and directed the TPO to delete the adjustment
made in this regard.
While analyzing the applicability of provision of
Section 92(3) of the Act, the ITAT did not consider the findings of
the Kolkata Tribunal in the case of Instrumentarium Corporation Ltd
Vs ADIT [ITA Nos. 1548 and 1549/Kol/2009] wherein the tax base
erosion theory was analyzed from Indian perspective. The Tribunal,
in the aforesaid case, viewed the concept of "base
erosion" in the light of Indian tax legislation rather than
considering an overall holistic view in relation to the taxability
of the taxpayer and its AEs in India. It is held that none of the
provisions of Indian tax legislation provides for any circumstances
which support a corresponding deduction in the hands of Indian AEs
in the event if the new income is brought to tax in the hands of
taxpayer. The ITAT, in the instant case, however, remained
completely silent on the concept of "correlative adjustment
Source: Cummins Inc Vs Assistant Director of Income Tax
[ITA No. 2181/PN/2013]
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