By Geeta Jani, Dhishat B. Mehta Chartered Accountants
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Sections. 10B, 92C, the Act – as legislative intent behind section 10B is to provide incentive to EOUs to bring foreign exchange into India, benefit cannot be allowed in case of suo moto transfer pricing adjustment since foreign exchange is not brought into India.
Facts:
The taxpayer was an Indian Company. The taxpayer was engaged in the business of development and export of software. It was registered as a 100% EOU eligible to claim tax holiday benefit u/s. 10B of the Act. While filing transfer pricing report in Form 3CEB, the taxpayer made suo moto transfer pricing adjustment in respect of its sale transactions with its associated enterprises (AEs). It did not make corresponding adjustment in books of account. Further, it also did not receive the adjusted amount from its AEs in foreign exchange. However, it claimed the tax holiday benefit u/s. 10B on the enhanced amount.
TPO accepted the adjustment made by the taxpayer. However, the AO did not allow tax holiday benefit on the suo moto adjustment amount.
Held:
The first proviso to section 92C(4) of the Act provides that, in case of enhancement of income consequent to determination of the arm’s length price by the Tax Authority, the tax holiday benefit is not to be allowed in respect of the enhanced income.
Though the Act is silent in respect of suo moto adjustment by the taxpayer, section 92C cannot be read in an isolated manner but must be read in consonance with the tax holiday provisions under consideration.
The legislative intent of section 10B is to give incentive to a 100% EOU. The tax holiday benefit is provided only when the convertible foreign exchange money is brought into India within stipulated period. If the tax holiday benefit were to be allowed to the taxpayer because there is no enhancement by the TPO, then every taxpayer would underprice sale with AEs, make suo moto adjustment and claim tax holiday benefit without bringing foreign exchange into India.
Having regard to the legislative intent, the taxpayer cannot be permitted to stretch the benevolent provision to avail the benefit which the Legislature never intended to provide.
On a harmonious reading of the provisions of the ITL and considering the intent of the Legislature, the Taxpayer is not entitled to claim deduction in respect of the amount of voluntary TP adjustment.
In I Gate Global Solutions Ltd [112 TTJ 1002 (2007)] the Bangalore Tribunal held that the relevant provision to disallow tax holiday benefit does not apply where the transfer pricing adjustment is made on suo moto basis by the taxpayer. However that decision had not considered the relevant tax holiday provision and the legislative intent and therefore, is distinguishable.
