The Delhi Bench of the Income-tax Appellate Tribunal in the case of Tianjin Tianshi India Private Limited Vs. ITO, Ward 16(3) [ITA No. 3991/Del/2010] (Assessment Year 2006- 07), held that existence of actual cross border transaction and motive to shift profits outside India or evade taxes in India are not necessary pre conditions for Transfer Pricing (TP) provisions to apply.
Facts of the case
• The taxpayer was engaged in the business of trading and distribution of products manufactured by overseas group companies. One of the group companies had established a Permanent Establishment (PE) in India which purchased these products from the group companies and resold them to the taxpayer.
• The Transfer Pricing Officer (TPO) made an adjustment to the income of the taxpayer by reducing the purchase price of the goods which were purchased from the PE.
• Aggrieved by the order of the Assessing Officer, the taxpayer appealed to the Commissioner of Income-tax (Appeals) [CIT(A)]. CIT (A) deleted the adjustment.
• Aggrieved by the order of the CIT(A) , the tax department appealed to the Tribunal.
Tax department’s contentions
1. The CIT(A)’s observations that the Indian TP regulations do not apply to transactions which are not cross border (i.e. which take place within India) is erroneous. The TP regulations would apply when one of the parties to the transaction is non-resident. In the present case, one of the parties was the PE of a foreign company and was non-resident.
2. The purported legislative intent behind enactment of Indian TP regulations viz. to counteract tax avoidance through shifting of profits outside India was not relevant when the provisions of law were unambiguous. The provisions of law were clear that TP regulations would apply when one of the parties to a transaction was non-resident, even though subject to Indian tax jurisdiction.
Taxpayer’s contentions – There was no cross border transaction as the entity making sale to the taxpayer (viz. PE of taxpayer’s associated enterprise) was located in India and was subject to Indian tax jurisdiction with regard to income-tax, import duty, sales tax, VAT, etc. The PE was assessed in India as a foreign company which is chargeable to a higher rate of tax. This is evidence of the fact that there is absence of motive to shift profits or to evade taxes in India.
Tribunal’s ruling – The TP regulations would apply when one of the parties to the transaction is non-resident, even if the transactions take place within India. There is no need to look into the legislative intent behind introduction of TP provisions (like counteracting shifting of profits outside India) when the provisions themselves are unambiguous.
Our Comments –This ruling brings out the fact that transactions between an Indian PE of an overseas associated enterprise and a domestic company would be covered under Indian TP regulations by virtue of the fact that the PE is designated as a foreign company and a non-resident.