By GEETA JANI, DHISHAT B. MEHTA,Chartered Accountants
Article 9 of India – Netherlands DTAA – No
bar in Article 9 to address juridical double taxation – Not confined to ALP
adjustment only in hands of domestic entities – Non-availability of relief
under article 9(2) does not negate application of article 9(1)
Facts
The Taxpayer is a company incorporated in
and tax resident of the Netherlands. During the year under consideration,
Taxpayer rendered certain technical services to its associated enterprises
(AEs) in India.The consideration received by the Taxpayer for rendering the
aforesaid services was treated as Fees for technical services (FTS) under
Article 12 of India Netherlands Double Taxation Avoidance Agreement (DTAA) and
thereby, taxed @ 10% on gross basis. During the course of assessment
proceedings, arm’s length price (ALP) in respect of FTS was determined at a
higher level and adjustments under the transfer pricing regulations
wereproposed by the Assessing Officer (AO).
Without disputing mechanics and
quantification of the ALP adjustments, Taxpayer argued that the adjustment was
not justified as additional fees would have been taxed in India in the hands of
Taxpayer @ 10%, whereas the AE in India would have obtained tax shied @ 33.99%
and net effect of adjustment was base erosion of Indian tax. Taxpayer,
therefore,contended that such adjustments are contrary to the scheme of section
92(3) of the Act read with CBDT Circular No. 14 of 2001.
The Taxpayer filed objection before Dispute
resolution panel (DRP). The DRP rejected the objections.
Aggrieved, Taxpayer appealed before the
Tribunal, where theTaxpayer put forth additional claim of treaty protection and
contended that considering the language of Article 9 of India-Netherlands DTAA,
ALP adjustment can only be made in case of juridical double taxation and only
in the hands of domestic enterprise. The Taxpayer further contended that ALP
adjustment was not permissible in its hands under Article 9 of
India-Netherlands DTAA.
Held
(i) In Instrumentarium
Corporation Ltd. Finland vs. ADIT [(2016) 71 taxmann.com 193 (SB)], the
Special Bench (SB) narrowed the scope of application of the “base erosion
theory” in transfer pricing matters. The Taxpayer was an ‘intervener’ in the
said decision and the argument of the Taxpayer on the base erosion was rejected
by SB.
(ii) As per the wording of
Article 9, there is no bar to address juridical double taxation. As long as the
conditions precedent in Article 9 are attracted, the application of arm’s
length standards come into play.
(iii) While Article 9(1) is an
enabling provision, TP mechanism under the domestic law is the machinery
provision. Once it is not in dispute that the arm’s length standards are to be
applied as per Article 9, it is only axiomatic that the manner in which arm’s
length standards provided under the domestic law need to be applied.
(iv) The provisions of Article
9(1) are clear and unambiguous and 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 AO has no discretion to read this provision as confined to
enabling ALP adjustment in respect of only domestic entities.
(v) The non-availability of
corresponding adjustment relief under Article 9(2) does not deter application
of Article 9(1). Therefore, the ALP adjustment cannot be negated onthe ground
that no relief against such taxation is granted by the residence state. An
element of double taxation is inherent in respect of taxation of FTS, which is
taxed in both countries under the treaty. However, in such cases also, the
taxation in source country is not dependent on the relief granted by residence
country. Thus, mere increase in quantum of such 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.
(vi) It may not be correct to
suggest that there is conflict between Article 9 and domestic transfer pricing
legislation. There is a school of thought that domestic arm’s length principle
goes much beyond 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.
Therefore, the provisions of tax treaties cannot be seen as restricting, or
overriding, domestic law mechanism on transfer pricing aspects.
(vii) The transfer pricing
legislation is an anti-avoidance provision. It cannot be rendered ineffective
on the basis of the limitations in the provisions of Article 9. Section 90(2)
of the Act gives somewhat unqualified superiority to the treaty provisions over
the provisions of the Income Tax Act which contain transfer pricing legislation
as well. It will infringe the neutrality of an anti-abuse law– notwithstanding
whether it is a specific anti-abuse regulation (SAAR) or a general anti-abuse
regulation (GAAR)– if it is considered to apply only to a non-treaty situation
but not to a treaty situation.
