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Total Number of Subscribers: 426 |
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Date: 9 April 2008 |
Compiled by Mr. M. Sathya Kumar |
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Tax avoidance and
transfer pricing law Taxation of multinational corporations (MNCs)
is assuming greater and importance because of the opening up of the Indian
economy and the entry of large transnationals into
the Indian market.
The ability of transnational corporations to allocate profits
to sister concerns outside the Indian jurisdiction by controlling prices in
group transactions has become a matter of great concern. Profits taxable in India should not be understated by
declaring lower receipts or higher outgoings than those which would have been
declared by persons entering into similar transactions with unrelated parties
in similar circumstances. Legislative changes were brought about through the Finance
Acts 2001 and 2002. The Central Board of Direct Taxes (CBDT) has explained in
Circulars 12 and 14 that the basic intention of the new transfer pricing
regulation is to prevent shifting out of profits by manipulating prices
charged or paid in international transactions, thereby eroding the country’s tax base. Section 92 of the Income-Tax Act 1961 lays down the Rule for
computation of the arm’s length price in respect of
international transactions between associated enterprises. Elaborate
machinery is prescribed under Section 92CA for determining the correct price.
In fact, Chapter X lays down special provisions relating to tax avoidance.
The Memorandum of the Finance Bill 2001 stated that Chapter X was introduced
as a measure to curb tax avoidance. Transfer pricing officers (TPOs)
have come on the field and are functioning in major cities. The assessing
officer (AO) can refer a case to the TPO after forming an opinion that it is
expedient to do so. The TPO will examine the arm’s length price (ALP) and
recommend to the AO the modus operandi for fixing the ALP. The approval of
the Commissioner of Income-Tax (CIT) is required for this purpose. Landmark ruling In a landmark ruling on transfer pricing regulations and the
fixation of ALP, a Full Bench of the Income-tax Appellate Tribunal (ITAT), in
the Aztec Software and Technology Services Ltd vs
ACIT (294 ITR AT 32 Bangalore, SB) case, considered the question whether it
is a legal requirement under Chapter X of the I-T Act that the AO should
prima facie demonstrate that there is tax avoidance before resorting to
Section 92CA. The Special Bench of five Members held that courts are not
required to look into the object or intention of the legislature by resorting
to aids to interpretation when the language of the provision is clear and
unambiguous. It is for the AO to form an opinion that circumstances exist
making it necessary to refer the matter to the TPO. The question of tax avoidance is not to be established by
following mandatory provisions. It is not necessary for the AO to demonstrate
the avoidance of tax before invoking these provisions. Observed the Special
Bench: “We are not required to find the intent of the
legislature by referring to the Budget Speech of the Finance Minister, Notes
on Clauses, Circulars etc., when the language of the statute is clear and
unambiguous. Headings or Marginal Notes do not control a provision where
plain and unambiguous language has been used by the legislature.” According to the Special Bench, there is no such requirement
of establishing tax evasion before initiation of proceedings for
determination of ALP. Section 40A provides for disallowance of excessive or
unreasonable expenditure in matters concerning transactions between sister
units. The Special Bench ruled that Chapter X is not governed by
Section 40A. It also held that the availability of exemption under Section
10A will not bar the applicability of Sections 92C and 92CA of the Act. It is
for the assessee to substantiate the most
appropriate method by proper documentation. The burden of proof about the
correctness of the price charged to associate enterprises is on the assessee. Important consequences This ruling of the Special Bench of the Appellate Tribunal
will have far-reaching consequences in the application and interpretation of
the transfer pricing law. At one sweep, the Special Bench has brushed aside
the Finance Minster’s speech, Notes on Clauses and the Memorandum explaining the
provisions of the law as not relevant in deciding the question whether
attempt at tax evasion or avoidance should be proved before invoking Chapter
X. Even the exemption provision for newly established
undertakings in free trade zones will have to be disregarded when it comes to
a question of applying the TP law. Naturally, the Special Bench has ruffled the feathers of tax
jurists and the ruling is now the subject matter of intense controversy.
Courtesy : Mr. T. C. A Ramanujam |
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