Case Law Details

Case Name : Gharda Chemicals Ltd. Vs DCIT (ITAT Mumbai)
Appeal Number : ITA No. 2242/Mum/06
Date of Judgement/Order : 30/11/2009
Related Assessment Year :

RELEVANT PARAGRAPH

8. We have heard the rival submissions at length and perused the relevant material on record. The Id. counsel for the assessee contended that the provisions of section 92CA were not applicable in the present case because there was no reduction in the tax liability of the assessee. He stated that it was not a case in which the assessee had endeavored to reduce any income or the incidence of tax. It was pointed out that Dicamba was exported by the assessee to USA and other countries. Direct export to USA was not permissible and in order to overcome this difficulty, the Id. AR submitted that it was essential to have enterprise at USA. Keeping into consideration the business interest, it was decided by the assessee to create its AE under the name of Gharda USA Inc. It was put forth that total quantity sold by the assessee to its AE was 2,72,100 Kgs. Dicamba as against the total sale of 4,18,803/- Kgs. to several other destination countries including the export to AE. The Id. A.R pointed out that Gharda USA Inc. was actually in losses over a period of years as against the assessee having positive income. Shri Pardiwala submitted that the sale of Dicamba to AE @ 14.66 US $ per Kg. did not result into lowering of the tax incidence in view of the fact that if higher price had been charged from AE, that would have resulted into further losses in the hands of AE. By selling Dicamba at this rate to AE, the Id. A.R stated that there was no ultimate effect on the tax liability of the assessee, when considered in totality along with its AE. In view of these facts it was put forth that the entire exercise done by the TPO be declared as illegal and the ALP declared by the assessee be accepted.

9. We are not convinced with this submission for the reason Chapter X contains special provisions relating to avoidance of tax. Sections 92 to 92F deal with the computation of income from international transactions having regard to ALP. Section 92(1) states that income arising from an international transaction shall be computed having regard to the ALP. There is no dispute on the fact that M/s. Gharda USA Inc. is an Associated Enterprise of the assessee within the meaning section 92A and as such the transactions of the sale of Dicamba by the assessee to its AE are international transactions as per section 92B of the Act. In such a situation computation of ALP is required to be made according to the provisions of section 92C. The rationale behind the transfer pricing provisions is to curtail the avoidance of tax in India. The argument advanced by the Id. A.R that the transfer pricing provisions are not applicable in view of the total incidence of tax remaining at the same level due to losses incurred by AE offsetting the income of the assessee, does not merit acceptance. The intent and purpose of these provisions is not to ensure that there is no diminution in the tax liability of Indian Enterprise as well as its AE on a total basis. Rather the logic is to make certain that the transactions between the Associated Enterprises should not be arranged in such a way that the ultimate tax payable in India is artificially reduced. If goods worth Rs. 100/-, which are sold for Rs. 125/- to unrelated parties are sold to the AE at Rs. 105/-, there is reduction of income to the extent of Rs. 20/- in the hands of Indian Enterprise. If the Indian Enterprise had charged the same price from its AE as that from the unrelated parties, its profit would have been Rs. 25/- instead of Rs. 5/- by way of a sale to AE. /How much tax is paid by the foreign AE is not relevant in the determination of correct tax liability in the hands of the Indian enterprise.) /What is material is that the rightful tax payable in India should not suffer due to the adjustment of price for goods or services between the related enterprises^ The contention of the Id AR that the entire exercise of determining ALP of the transactions between the two enterprises is useless as the price charged or paid by one enterprise to another AE is tax-neutral on totality, therefore, is sans merit. The payment of tax by the AE abroad does not contribute anything to the Indian exchequer. Important factor is the payment of tax qua India and not qua the assessee along with its AE on a whole. If we agree with this submission of the Id. A.R that as the ultimate tax liability of the assessee together with its AE does not vary even if the lower price is charged inter se, and hence the exercise done by the TPO be held as fruitless, then the provisions of section 92 to 92F would become redundant. Since the provisions require the determination of the ALP in an international transaction between the associated enterprises, it is imperative to undergo this exercise so as to prevent any loss to the coffers of India kitty. We therefore, reject this submission made on behalf of the assessee as devoid of any merit.

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