Transfer Pricing Provisions Ruled Out, If Tax Liability Absent

Authority for Advance Rulings has decided that the income-tax department cannot apply transfer pricing provisions, if a foreign company does not have a liability to pay tax. This ruling would give relief to the Netherlands-based Vanenburg Group BV which had shifted the entire shareholding of its Indian subsidiary Cordys R&D (India) Pvt Ltd to its Cordys Holdings BV (Netherlands).
Vanenburg Group had asked a judgment from the AAR on whether the relocation would draw capital gains tax and the transfer pricing provisions under Sections 92-92F of the Income-Tax Act, 1961.
The AAR ruled that capital gains arising out of this relocation would not draw tax under Article 13(5) of the India-Netherlands double taxation avoidance agreement. Also, the provisions under Section 92-92F of the Income-Tax Act, 1961, are machinery provisions and will not apply in case of absence of liability to pay tax. The norms are intended to prevent avoidance of tax by devices such as arm’s length pricing and computation of income in certain cases in relation to international transactions.
BSR & Co partner Sudhir Kapadia said, “This is the first ruling on an important question whether transfer pricing rules will apply in a situation where underlying transaction is exempt from taxation under the relevant treaty. The ruling gives an important guidance of the fact that transfer pricing provisions, being machinery provisions, would not be applicable where substantively there is no tax liability under basic principle.”
Though, the ruling will not be binding in other cases, but it is likely to have an influential value.

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