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.
 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.
 Grievance of the assessee was rejected by the Dispute Resolution Panel. The assessee is aggrieved and is in appeal before us.
 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:
 Learned counsel, however, has more armoury in store. He seeks the treaty protection for the first time at this stage, and contends that, in view of the treaty protection available to the assessee, the impugned ALP adjustments cannot be made in the hands of the assessee. It is pointed out that there is no dispute about the assessee being a tax resident of the Netherlands, and, accordingly, being entitled to the protection of India Netherlands Double Taxation Avoidance Agreement [Indo-Dutch tax treaty, in short; 177 ITR (St) 72]. His basic argument is that Article 9 of the Indo Dutch tax treaty does not permit ALP adjustments except in the case of juridical double taxation and only in the hands of a domestic enterprise, and, as provisions of the tax treaties override the provisions of the Indian Income Tax Act, except to the extent these provisions are more beneficial to the assessee, no ALP adjustment can be made in the hands of the assessee. In other words, while he does not dispute ALP adjustments being in accordance with the provisions of the domestic TP legislation embodied in the Income Tax Act, he contends that such ALP adjustments are not permissible under Article 9 of the Indo Dutch Tax treaty. Learned counsel has rather reluctantly accepted that the stand taken by the assessee, i.e. the ALP adjustments, under article 9(1) can only be made in the hands of a domestic enterprise, donot prima facie emerge from a plain reading of the above treaty provisions. His contention that his view is supported by OECD Commentary, which has been held to be in the nature of contempranea expositio, and the views of a German scholar, late Prof Klaus Vogel. His argument is based on the theory that while article 23 provides relief from juridical double taxation, by granting exemption to income taxed in the other jurisdiction, the role of article 9 is to provide relief from economic double taxation. His emphasis is that, as noted in the OECD Commentary and in Prof Vogel analysis, article 9(1) authorizes rewriting of the profits of the assessee so as to truly capture the profits arising to the assessee in the source jurisdiction. The corresponding adjustment, envisaged by article 9(2), relives the economic double taxation caused by adjustments due to such rewriting of profits. It is on this basis that the learned counsel urges us to hold that the impugned ALP adjustments cannot be made. Learned Departmental Representative opposes the stand of the assessee and submits that such an issue cannot be raised for the first time before the Tribunal. It is pointed out that as the assessee has not been able to show any fault in the stand of the authorities below, and has accepted that the same is now upheld by the Special bench decision in the case of Instrumentarium Limited (supra)- wherein the assessee was also one of the interveners, the appeals should be dismissed summarily. Without prejudice to this stand, on merits of the plea now raised by the assessee, he submits that once the assessee himself accepts that the wordings of Article 9 donot support his case, there is no occasion to refer to any commentary or scholarly analysis to find out the alleged scheme of the treaty which is not evident from plain and simple words. We are urged to confirm the orders of the authorities below and decline to interfere in the matter. In his brief rejoinder, learned counsel for the assessee reiterates his submissions
 So far as admission of the additional plea at this stage is concerned, we find that, in view of Hon’ble Supreme Court’s judgment in the case of NTPC Ltd vs CIT [(1998) 229 ITR 383 (SC)] and bearing in mind the fact that this is purely a legal issue, it is required to be admitted for adjudication on merits. Having admitted this legal plea for adjudication, and for the reasons we will set out in a short while, we find it entirely devoid of any legally sustainable merits, and, accordingly, we reject the same. Before we move on to the arguments on merits, which essentially centre around interpretation of article 9 of Indo Dutch tax treaty, we consider it appropriate to set out the relevant article as follows:
ARTICLE 9- ASSOCIATED ENTERPRISE
a. an enterprise of one of the States participates directly or indirectly in the management, control or capital of an enterprise of the other State; or
b. the same persons participate directly or indirectly in the management, control or capital of an enterprise of one of the States, and an enterprise of the other State,
and in either case conditions are made or imposed between the two 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.
(2) Where one of the States includes in the profits of an enterprise of that State – and taxes accordingly – profits on which an enterprise of the other State has been charged to tax in that other State and the profits so included are profits which would have accrued to the enterprise of the first-mentioned State if the conditions made between the two enterprises had been those which would have been made between independent enterprises, then that other State shall make an appropriate adjustment to the amount of the tax charged therein on those profits. In determining such adjustment, due regard shall be had to the other provisions of this Convention and the competent authorities of the States shall if necessary consult each other.
 Coming to the merits of learned counsel’s arguments, the underlying proposition, on which entire foundation of learned counsel’s complex web of reasoning rests, is that it is only economic double taxation which can be addressed by article 9. While on this aspect of the matter, it is useful to take note of the fact that juridical double taxation refers to a situation in which the same person gets taxed in respect of the same income in more than one tax jurisdiction. Economic double taxation, on the other hand, refers to the situation in which the same income, though in different hands, gets taxed in more than one jurisdiction. The point of time when article 9 first saw light of the day, i.e. in the first half of the last century, it coincided with the ‘affiliated companies’, which were as a norm under League of Nations’ first draft convention in 1927 treated as ‘permanent establishment’, being taken out of the definition of the ‘permanent establishment’. The emphasis, therefore, could indeed have been to check the underreporting of profits in the source jurisdiction by these affiliated companies, and, as such, any aggressive application of this principle could only have resulted in economic double taxation since subsidiaries and the parent companies are distinct entities. However, this article leaned upon the arm’s length standards as a measure to address this malady, and, of course, the remedy being conceptual, the remedy was far sighted and much more comprehensive which could stand the test of time for long long time to come even in situations not envisaged at that point of time. It is not relevant today as to what was the malady sought to be addressed by the introduction of article 9 at that point of time, which may have only been economic double taxation, but what is relevant is whether the article 9 is worded wide enough to cover the contemporary transfer pricing legislation dealing with situations of economic as also juridical double taxation. As to the latter, in our humble understanding, there is no bar in the article 9 to leave out the cases of juridical double taxation. The distinction between economic double taxation and juridical double taxation does not find place there at all. As long as the conditions precedent in article 9 are attracted, the application of arm’s length standards certainly comes into play. While it is true that the examples given in the commentaries and the analysis of some foreign scholars deal with the cases of economic double taxation, but that does not negate the fundamental position that, as is the specific mandate of the article, when “conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises”, the addition profits by applying arm’s length standards (i.e. 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. There is no, and there cannot be any, dispute about the fact that these conditions are satisfied on the facts of the present case, as indeed in every case covered by the Indian transfer pricing legislation. Once it is not in dispute that the arms length standards are, therefore, to be applied in computation of taxable profits, as is specific mandate of article 9, it is only axiomatic that the manner in which arm’s length standards are to be applied is something which has not been defined by the treaties and the mechanism provided under the domestic law, therefore, must hold good. Article 9(1) does not, and cannot, provide the basis of the ALP adjustments as tax treaties restrict application of domestic law of taxation rather than create independent rights of taxation. Article 9(1) is thus, in a way, an enabling provision, and the TP mechanism under the domestic law is the machinery provision. The provisions of article 9(1) permit ALP adjustment in all situations in which the arm’s length standards require higher profits in the hands of any “one of the enterprises, but by reason of those conditions, have not so accrued”to be “included in the profits of that enterprise and taxed accordingly”. The provisions are clear and unambiguous. There is no occasion to read this provision as confined to enabling ALP adjustment in respect of only domestic entities. The mere fact that examples given by the analysis of article 9(1), whether in the OECD Commentary or in scholarly analysis, are confined to economic double taxation situations does not imply that the article 9(1) cannot be applied to other situations. The examples, by definition, can only be illustrative and not exhaustive. The fact that arms’length standards were introduced by way of article 9 to tackle certain types of economic double taxation, even if that be so, does not fetter the application of these arms’length standards, in all dealings between the associated enterprises- as is unambiguous the scheme of article 9, including the cases resulting in juridical double taxation. As for the point that article 9(2) does not provide corresponding relief for the ALP adjustments made under section 9(1) in the present case, the application of article 9(1) cannot be declined solely on that ground. In the case of taxation of FTS, which are taxed in both the treaty partner countries, an element of double taxation in inherent in the scheme of the treaties, and its taxation in the source country is not dependent on the relief granted by the residence state. As a corollary to this fundamental position, the taxability of higher quantum of FTS in the source state cannot be negated on the ground that no relief against such taxation is granted by the residence state. All the examples given by the assessee simply demonstrate as to how while the relief in the cases of economic double taxation due to application of arm ’s length standards under article 9(1) is available under article 9(2), no such relief is available, under article 9(2), in respect of the juridical double taxation caused by the application of arm’s length standards. That does not, however, matter. The non availability of relief under article 9(2) does not fetter application article 9(1). In a situation in which the residence jurisdiction has yielded limited source taxation rights to a type of income of an assessee, the mere increase in quantum of such a taxable income in the source jurisdiction, due to application of arm’s length principle, need not always be visited with corresponding adjustment under article 9(2) in the residence jurisdiction. In our humble understanding, the restriction to the effect that only economic double taxation can be remedied by the scope of article 9, as learned counsel urges us to infer, does not exist. In view of these discussions, as also bearing in mind entirety of the case, we see no merits in this new plea raised by the assessee.
 Given our above findings, it is not even necessary to take the judicial call on whether or not article 9 of the Indo Dutch tax treaty, or, for that purpose, OECD Model Convention, restricts or regulates the domestic transfer pricing legislation. That aspect of the matter is academic as on now, because, even if we are to hold that it does restrict or regulate the domestic law provisions on transfer pricing, the application of arm’s length standard cannot be declined because it is a case of juridical double taxation and not economic double taxation. However, as we deal with this interplay between article 9 and transfer pricing legislation, it is important to bear in mind the fact that there is a school of thought that a domestic arm’s length principle, which is what transfer pricing legislation represents, goes
much beyond a tax treaty’s normal rule making scope since this arm’s length principle governs taxation of an enterprise in general and the tax treaties do not restrict domestic law in this respect. The profit adjustment mechanism, envisaged in tax treaties, do not deal with supra national income determination, and, therefore, the provisions of tax treaties cannot be seen as restricting, or overriding, domestic law mechanism on this aspect. There is no conflict in the tax treaties and the transfer pricing legislation as such. It would be contrary to the sense and purpose of a double taxation avoidance agreement to prohibit this kind of adjustments of income as may be necessary. It is also useful to bear in mind the fact that article 9, in a way, was precursor to the present transfer pricing regime globally, even though this article also constitutes enabling provision for ALP adjustment under the domestic transfer pricing regulations. When we look at the historical developments with respect to development of article 9(1), we find it has been a long journey from its primitive applications in the PE situations, which invariably included subsidiaries at that point of time, to its equally valid application in the context of modern day complex business models. On the first principles, therefore, the transfer pricing legislation cannot be rendered ineffective on the basis of the limitations in the provisions of Article 9. This principle is statutorily recognized in tax legislation in many jurisdictions, including in the fatherland of Dr Vogel himself- on whose commentary so much reliance has been placed by the learned counsel. Of course, a clear indication to that effect in Section 90 would certainly have helped clarifying this position and, to that extent, any anti abuse legislation, even if integral part of the Income Tax Act, must always, if so intended, clearly and unambiguously qualify the treaty superiority over the domestic law. That, however, does not seem to be the case. Section 90(2) does give a somewhat unqualified superiority to the treaty provisions over the provisions of the Income Tax Act which contain transfer pricing legislation as well. If an anti abuse law, whether a specific anti abuse regulation (SAAR) or a general anti abuse regulation (GAAR), is to apply only to a non treaty situation and does not extend to a treaty situation, it will infringe neutrality. That cannot have any sound conceptual justification and would be in gross deviation with the best practices globally. It is high time that the stand of the tax administration on this issue is clearly reflected in the legislation, and this kind of a litigation, as before us in these appeals, is avoided.
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