Relevant Extract of the Judgment
The assessee before us is a company incorporated in, and tax resident of, the Netherlands. During the relevant previous years, the assessee had rendered certain technical services to its associated enterprises in India, i.e. Hazira LNG Port Limited and Hazira Port Private Limited. The consideration received by the assessee for rendering these services, which was subject to tax @ 10% on gross basis in the hands of the assessee as fees for technical services under article 12 of India Netherlands Double Taxation Avoidance Agreement. The income so earned by the assesse, from rendition of technical services to Indian AEs, was subjected to arm’s length price adjustments under the transfer pricing regulations, to the tune of Rs 100.03 crores, as detailed in the preceding paragraph and spread over these four assessment years.
[4] While the assessee did not raise any dispute with respect to mechanics and quantification of the ALP adjustments, and that’s the reasons the facts relating to those aspects of the matter are not being set out here, the assessee did oppose theses ALP adjustments on the ground that by making these ALP adjustments, the Assessing Officer is eroding the Indian tax base. It was contended that the impugned ALP adjustments result in Indian tax base erosion, and are, therefore, contrary to the scheme of Section 92(3) read with circular no. 14 of 2001. This plea was explained, inter alia, as follows:
The Appellant submitted before the DRP that application of arm’s length principles for making TP adjustments under the aforesaid circumstances was not proper; and also against the principles and spirit of the TP provisions of India, since had the Appellant charged additional fees from its Indian AEs, namely HLPL and HPPL in order to comply with arm’s length standards, then the said additional fees would have been taxed in India in the hands of the Appellant @ 10% on gross basis, while at the same time, the said additional fees would have been allowed or deducted in the hands of the payers, namely HLPL and HPPL for the purposes of computing their business profits, where such allowances or deductions would have obtained tax shields @ 33.99%, say 34%, in the hands of the said payers. Thus, application of arm’s length principles would have resulted in the erosion of taxes payable in India to the extent of 24% (i.e. 34% – 10%) on an aggregate or cumulative basis, thus eroding the tax base of India, while the provisions of TP are meant to be applied for the reverse scenario, namely to check or protect the erosion of the tax base of the country.
[5] Grievance of the assessee was rejected by the Dispute Resolution Panel. The assessee is aggrieved and is in appeal before us.
[6] In the meantime, however, a special bench of this Tribunal, consisting of three members- including one of us, heard and adjudicated upon a similar issue relating to the theory or concept of “base erosion”in the case of Instrumentarium Corporation Ltd Finland Vs ADIT [(2016) 71 taxmann.com 193 (SB)]. This assessee, in its capacity as an intervener, was also heard by the Special Bench, and the arguments of the assessee were duly considered and adjudicated upon by the special bench. The plea of the assessee, on the theory of base erosion and as argued by the assessee, was rejected. When these appeals came up for hearing before us, learned counsel fairly accepted that the base erosion issue is now stands covered against the assessee by the special bench decision and that he has nothing to add so far as the arguments on the base erosion issue, which have already been heard and adjudicated upon by the special bench, are concerned. He, however, added that while special bench decision does bind this division bench of the Tribunal, and that is the reason he is not arguing on that aspect of the matter any further, he has legal submissions to make on the correctness of the special bench decision which he will make, if so necessary, before Hon’ble Courts above. As for this issue, (i.e. whether invoking transfer pricing provisions in case of an income in the hands of a non-resident enterprise, when it is tax deductible in the hands of an assessee in India and even when such an assessee is incurring losses, cannot be invoked as the same would amount to base erosion of tax base in India), as learned counsel fairly agrees, the issue is covered against the assessee by Special Bench decision in the case of Instrumentarium Limited (supra). The findings of the Tribunal, in this case, can be summarized as follows:
