Key info disclosure not a must for tax treaty benefits: ITAT

Transaction between different parts of a multinational group is not similar to transaction between two independent groups. The goods or service transferred within a group but to different parts is for a price. The same is termed as “Transfer Price.” It is the value attached to the transfer of such goods or services.

Transfer Pricing - As defined under Section 92 of the Income Tax Act, 1961 states “Computation of income from international transactions having regard to arm’s length price”

As per the decision of IIAT (Income Tax Appellate Tribunal), any company can avail the income tax treaty benefits between any country and India, even if the company doesn’t disclose important information for tax computation.

The decision was made by ITAT on the case related to Sun Chemical of Netherlands, where in the company failed to mention the capital gains earned from the shares acquired from an associate company. Income tax department denied the treaty benefits on the reason being that not all information were provided. The company did not mention that the acquired shares were from an associate company, which is important as the transfer pricing rules would be applied.

The company earlier sought benefits under Indian Income tax Act. Later the company decided to seek the benefits under DTAA (Double Taxation Avoidance Agreement) between Netherlands and India, after the company was probed by the Income Tax department about the share transaction with the associate company at prices (Transfer Pricing) lower than declared by the company. Under Double Taxation Avoidance Agreement between India and Netherlands, any capital gains arising in India is taxable only in Netherlands.

However the benefits of DTAA were not allowed by the assessing officer. The reason stated by the assessing officer was that only after the company was caught defaulting did the company opt for the option of DTAA. Also it was pointed by the assessing officer that the company was attempting to set off long term capital loss against short term capital gains. The last point made by the officer was benefits under DTAA are only applicable to honest and tax compliant company.

Another case which is critical to transfer pricing is related to Sony Private India Ltd. In this case, the appellate tribunal clearly stated that tax payer may chose the option of determining the appropriate transfer price by making adjustments within 5% of the uncontrolled price

Transfer pricing rules have been litigated against many times and there are possibilities for more issues to come to the court within some years. Few reasons being

Ø  Risk adjustment for captive service providers under sophisticated economic analysis;

Ø  Application of the profit split method when both parties are entrepreneurs, contributing to significant non routine intangibles; and

Ø  Right way to handle interest rates, guarantee fees and royalties

Though we have to note there are many inconsistencies in the judgments in similar cases. It is high time to amend regulations related to transfer pricing. It has been suggested that transfer pricing regulations should be analyzed on data from previous two years. But the Income tax department shunted the idea of comparability analysis of previous two years and has tested results on current year.