1. Introduction:
In the era of globalization, when multinational enterprises have branches, divisions, subsidiaries and offices operating across the globe; it is common for them to transact goods and services from one jurisdiction of an associated enterprise in another tax jurisdiction. The Finance Act, 2012 has made significant changes such as Advance Pricing Agreement (APA), expansion of Transfer Pricing Officer’s (TPO’s) Power, amendments relating to penalties, etc. Also, the Finance Act, 2012 introduced a new section 92BA in the Income-tax Act. Such provisions deal with the meaning of Specified Domestic Transaction. The proposed new section 92BA provides the meaning of “specified domestic transaction” with reference to which the income is computed under section 92 having regard to the arm’s length price. The globalization of the Indian economy has resulted in considerable increase in foreign institutional investments, a huge expansion in the production and service base and also a multiplicity of international transactions. In the present age of commercial globalisation, it is a universal phenomena that Multinational Companies (MNCs) have branches/subsidiaries/divisions operating in more than one country. In such a situation, it is a common event for MNCs to transfer goods produced by a branch in one tax jurisdiction to an associate branch operating in another tax jurisdiction. While doing so, the MNC concerned has in mind the goal of minimizing tax burden and maximizing profits but the two tax jurisdictions/countries have also the consideration of maximizing their revenue while making laws that govern such transactions. It is an internationally accepted practice that such ‘transfer pricing’ should be governed by the Arm’s Length Principle and the transfer price should be the price applicable in case of a transaction of arm’s length. In other words, the transaction between associates should be priced in the same way as a transaction between independent enterprises.
2. Principles of MNCs taxation are enshrined on OECD Model Tax Convention
The principles governing the taxation of MNCs are embodied in the OECD Model Tax Convention of Income and Capital (OECD Model Convention), which serves as the basis for the bilateral income-tax treaties between OECD member countries and between OECD member and non-OECD member countries. According to these guidelines, “Transfer prices” are the prices at which an enterprise transfers physical goods and intangible property or provides services to associated enterprises. Two enterprises are “associated enterprises” if one of the enterprises participates directly or indirectly in the management, control or capital of the other or if both enterprises are under common control. Since international transfer pricing involves more than one tax jurisdiction, any adjustment to the transfer price in one jurisdiction requires a corresponding adjustment in the other jurisdiction. If a corresponding adjustment is not made, double taxation will result.
3. Arm’s Length Principle
The Arm’s Length Price of a transaction between two associated enterprises is the price that would be paid if the transaction had taken place between two comparable independent and unrelated parties, where the consideration is only commercial. The Arm’s Length Principle (ALP), in the context of taxation, is explained in the OECD Model Tax Convention as under:
“Where conditions are made or imposed between two associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.”
4. Audit Report [Section 92E]
Under section 92E, every person who enters into an international transaction during a previous year is required to obtain a report from a chartered accountant and furnish such report on or before the specified date on the prescribed form. Rule 10E provides that the auditor’s report shall be in Form No.3CEB.
5. Penalties
The penalty provisions in respect of international transaction are broadly covered under section 271BA providing for levy of penalty of Rs. 1 lakh in cases where any person fails to furnish a report from an accountant as required by section 92E, section 271AA providing for penalty for failure to keep and maintain information and document in respect of international transaction and section 271G which provides for penalty in case of failure to furnish information or document under section 92D.
6. Ignorance of law in not furnishing Sec. 92E Report – whether a reasonable cause for not levying penalty under section 271BA
This issue came up before Amritsar Tribunal in the case of Ajit Singh Rana vs. Assistant Commissioner of Income-tax [(2013) 33 taxmann.com 502 (Amritsar – Trib.)], whereby it was held that ignorance of law of Chartered Accountant of assessee could not be a reasonable cause for failure to file audit report regarding its international transactions and for not levying penalty under section 271BA. In the given case, for the assessment year 2006-07, the Assessing Officer found that the assessee had not furnished the audit report regarding its international transactions as required to be furnished under section 92E. and hence the Assessing Officer initiated penalty proceedings. The Assessing Officer imposed penalty under section 271BA for the assessment years 2003-04 to 2006-07. It was further contended that initiation of penalty proceedings were beyond the period of limitation of four years. The Commissioner (Appeals) rejected the assessee’s contentions and confirmed the order of the Assessing Officer.
The assessee submitted that before Hon’ble Tribunal that
- Considering the judgements in the case of CIT v. NHK Japan Broadcasting Corpn. [2008] 305 ITR 137/172 Taxman 230 and CIT v. Satluj Jal Vidyut Nigam Ltd. [2012] 345 ITR 552/27 taxmann.com 186 (HP), no limitation is prescribed for levy of penalty u/s 271BA as in section 201 of the Act. Therefore, such liability cannot be allowed to remain hanging on the head of the assessee for all the times to come where the department decides not to take action. Accordingly, following the said judgments of Hon’ble Delhi High Court and Hon’ble Himachal Pradesh High Court, the AO was not justified in initiating the penalty proceedings under section 271BA, which is barred by limitation since the same has been initiated beyond the period of limitation of four years from the end of the impugned financial year. Since the issue in all the three years is identical, especially for the assessment years 2003-04 & 2004-05, the AO could not have initiated penalty proceedings beyond a reasonable period of four years.
- the audit report was obtained before due date of filing the return but the same could not be filed as the provisions of section 92E were new provisions about which the assessee’s CA was not aware. According to the assessee this constituted a reasonable cause for not levying penalty under section 271BA.
Hon’ble Tribunal accordingly held that:
- the decisions of the Hon’ble Delhi High Court in the case of NHK Japan Broadcasting Corpn. (supra) and Hon’ble High Court of Himachal Pradesh in the case of Satluj Jal Vidyut Nigam Ltd. (supra) are on section 201 of the Act, where the default is in the public domain because the assessee had deducted the tax at source or in such cases, where the assessee had not deducted tax at source. Therefore, such cases are quite distinguishable as compared to the present facts and circumstances, in all the three years of the assessee. In the present case, the department was never aware that the audit report as required under section 92E of the Act has been filed or was required to be filed.
- ignorance of law is of no excuse, especially the CA who has audited the accounts of the assessee and the assessee has stated of having obtained the audit report but did not file the audit report alongwith return of income could not by any stretch of imagination be a reasonable cause for failure to file the audit report under section 92E of the Act. As per section 92E of the Act, every person who has entered into international transaction during a previous year shall obtain report from an Accountant and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed. Therefore, these provisions contained in section 92E and provisions of section 271BA cannot be equated with section 271B of the Act. No reasonable cause has been established by the assessee before any of the authorities below or even before us under section 271B of the Act. Therefore, the arguments made by the ld. counsel for the assessee will not help the assessee.
Compiled by FCA Kamal Garg. He is engaged in IFRS – Audit and Advisory, FEMA, Valuation, International Taxation and XBRL Services. He can be approached at cakamalgarg@gmail.com, 9811054015
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