[2014] 41 taxmann.

com 310 (Article)

[2014] 41 taxmann.com 310 (Article)

Date of Publishing: January 16, 2014

Analysis of decision of Hyderabad ITAT in case of IJM (India) Infrastructure Ltd. v.

Asstt. CIT [2013] 37 taxmann.com 200 (Hyd. - Trib.) relating to non-applicability of
transfer pricing provisions to PE of foreign company
TEJAS CHANDULAL SHAH
CA

Introduction

1. Recently, Tribunal ("ITAT") Hyderabad has pronounced one ruling in the case of IJM (India) Infrastructure
Ltd v. Asstt. CIT [2013] 37 taxmann.com 200 (Hyd. - Trib.) wherein the ITAT has held that permanent
establishment of foreign company is "resident" in India and transactions of the assessee-company with such PE
of foreign company are not liable for compliance with provisions under Chapter X of the Income-tax Act, 1961.
The said ruling even though being facts specific, has laid down certain principles which are worth examination
and requires second thought. The principles laid down by ITAT in the said ruling are as under:

♦ Project office of Malaysian company is resident in India as per section 6(3) of the Act
• The project office of IJM Corp. Berhad, Malaysia ("IJM Malaysia") is registered under
section 592 of the Companies Act, 1956 with the Registrar in India and by virtue of such
registration, its affairs are controlled and managed in India.
• One of the Directors of the said company is nominated as Attorney for the purpose of project
office in India.
• The Director, so nominated, is empowered to manage and operate entire operations in India
and all the decisions relating to operations in India are taken in India.
• The Director who has been entrusted with managing affairs of project office in India is
residing in India.
♦ PE of Malaysian company (which is a project office) should be considered as "resident" in India
applying provisions of Article 24 of Double Taxation Avoidance Agreement (DTAA) between India
and Malaysia.
• As per Article 24 of India - Malaysia DTAA, national of Malaysia should not be discriminated
and should be given same tax treatment as national of India under similar circumstances.
• In view of all decisions relating to operations of project office which are being taken in India
similar to any branch of Indian company having operations in India, project office (which is
PE in India) should be considered as resident in India applying Article 24 of DTAA between
India and Malaysia.
• Reliance was placed on the ITAT Ahmedabad ruling in the case of Rajeev Sureshbhai
Gajwani v. Asstt. CIT [2011] 129 ITD 145/10 taxmann.com 62 (SB)
• Transfer provisions should not apply where there is no possibility of shifting of profits
outside India
♦ Transactions of the assessee with its project office are between two tax residents as mentioned
above.
• Project office is being assessed as "PE of foreign company" in India
 • No motive to shift the profits or evade the tax in India as business profit is taxable in
separate legal entity in India.
• In connection with the above proposition, ITAT has relied upon following case laws:
■ Philips Software Centre (P.) Ltd v. Asstt. CIT [2008] 26 SOT 226 (Bang)
■ Dresdner Bank A.G. v. Addl. CIT [2007] 108 ITD 375
■ ITO v. Zydus Altana Healthcare (P.) Ltd. [2011] 44 SOT 132 (Mum.)
■ Cotton Naturals (I) (P.) Ltd. v. Dy. CIT [2013] 32 taxmann.com 219
(Delhi)
The above ruling has highlighted certain concepts which are interesting to observe and further examine as it
may have catastrophic effect on applicability of transfer pricing provisions more particularly for years prior to
FY 2012-13 (i.e., for years when provisions of chapter X of the Act were not applicable for transactions between
two residents) in relation to international transactions.

Further, for FY 2012-13 and subsequent years also, the ruling is relevant as much as the question of
applicability of provisions of Chapter X of the Act is concerned. Hence, applying the principle laid down by the
Hon'ble ITAT, transfer pricing provisions will still not apply, even after amendment to provisions of section
40A(2) and Chapter X of the Act vide Finance Act, 2013, unless there exist any intent to shift profit outside
India or there exist erosion of tax base.

In summary, the three principles which have been relied upon by the ITAT, for holding that Project Office in
India ("PE" under the DTAA between India and Malaysia) of Malaysian company is resident in India and
provisions of chapter X of the Act are not applicable to transactions of the assessee company (i.e. Indian
company) with such PE of Malaysian company, are as under:

♦ When daily affairs of project office is managed wholly from India, the PO is resident in India
♦ Branch of foreign company should be considered as "resident" otherwise it will result in violation of
Article 24 of India- Malaysia DTAA.
♦ In absence of shifting of profit outside India, provisions of chapter -X of the Act are not applicable.

Principal arguments

2 . Hereunder, each of the above three principal arguments/ contentions based on which the ruling was
rendered has been examined:

(1) Project Office of IJM Malaysia is resident in India

India follows residence based taxation and, hence, under the provisions of the Act, taxability of taxable subject
(i.e. tax payer/person) depends upon the residential status of the tax payer. Residence under the domestic law
(i.e. Income-tax Act, 1961) depends upon the category of person and compliance with the conditions relating to
residential status. In the captioned matter, the issue pertains to determination of the residence of IJM Malaysia
which is a foreign company and having project office (i.e. PE) in India. In view of the fact that IJM Malaysia is a
company, let us examine condition for residential status for a person which is a company. The criterion for
determination of residential status of a company has been prescribed under section 6(3) and the same has been
reproduced hereunder for ready reference:

(3) A company is said to be resident in India in any previous year, if-

(i) it is an Indian company ; or

(ii) during that year, the control and management of its affairs is situated wholly in
India.

From above, it is evident that "Indian company" is always resident in India. Hence, it is important to refer to
the definition of "Indian Company" under section 2(22A). For ready reference, the same has been reproduced
below:
(22A) "domestic company" means an Indian company, or any other company which, in respect of its income
liable to tax under this Act, has made the prescribed arrangements for the declaration and payment, within
India, of the dividends (including dividends on preference shares) payable out of such income ;

From above, it is evidently clear that companies incorporated in India or company which has made
arrangement for declaration and payment of dividend in India are resident for the purpose of the Act. In view
of the same, Project Office, Branch, Fixed Place PE, Service PE, agency PE, liaison office, etc. will never be
considered as "resident" under first condition/criteria.

Now, let us examine applicability of second condition/criteria of "control and management of its affairs is
situated wholly in India". If we divide the content of second condition, second condition/ criteria has following
aspects:

♦ Company's control and

management;
♦ Of company's affairs; and
♦ Situated wholly in India
From careful reading of the second condition for determination of residential status of company, we can make
out that it talks about "control and management of the company". The requirement to examine company's
control and management come from the definition of "person" who is "taxable subject" for the purpose of levy
of Income-tax under any taxing statute. As per section 2(31) of the Act, "company" is considered as taxing
statute and not branch/PE/Project Office, etc.

Further, second aspect of the second condition talks about "company's affairs" and not about only affairs of the
Project Office/Branch Office/PE/Liaison office.

Last and most important aspect of the second condition is quantum of the situs of control and management.
This is very important as a company can have more than one place of control and management. However, for
being resident in India for a company not incorporated in India, the condition is that the control and
management should be wholly within India.

In this regard, we would now discuss, how the Hon'ble ITAT has read the above three criteria of section 6(3 ):

♦ The Hon'ble ITAT has construed "Project office" as taxable unit disregarding its head office which is
foreign company and considered "Project Office" as liable to tax in India as company falling within
the definition of "person" under section 2(31) of the Act.
♦ "Project Office" is registered under section 592 of the Companies Act, 1956 and, hence, should be
construed as managed within India.
♦ Day to day affairs of the project office are managed from India. Project director having authority to
take decisions on the activities relating to day to day matters of project office and his presence in
India has been construed as "situated wholly" in India.
The approach adopted by the ITAT to hold PE as resident in India is debatable and untenable in light of the
statutory provisions.

♦ "Project Office" being a permanent establishment and independent of its head office (i.e. foreign
company) do not fall within the definition of "person" as the taxable subject must first fall within the
definition of "person" under section 2(31) of the Act if we need to look at PE in India separately.
Hence, for determination of "residential status", separate legal entity approach cannot be applied.
Separate legal entity approach is applicable for quantification of income and not for determination of
"Residential Status"
♦ Section 6(3) requires examination of "control and management" of company which is one of the
eligible taxable subjects under section 2(31)
 ♦ Hence, if we have to ignore foreign company then, PE on its own is not a taxable subject or at least
not taxable as a company. In such event, the condition for residential status may get changed. Hence,
to remove such absurdity in application of the provisions, if we have to consider PE as part of foreign
company then taxable subject is such foreign company and in such circumstances the "control and
management of the company" is required to be examined and not of the project office".
♦ The requirement to look for the "company" as a whole can also be understood from the perspective of
section 6(5) of the Act where the statutory provisions specifically states that the residential status for
one source of income is if "resident" than for all source of income, the same should be considered as
"resident" only.
♦ Further, determination of "residential status" is the foundation based on which "scope of income"
which is liable to tax is determined and, hence, it precede determination of income rather than vis-a-
versa.
♦ The requirement of "wholly within India" is most exhaustive requirement and, hence, if the "control
and management" of the taxable subject if situated even partly or fraction of the period or for even
some part outside India, the condition will not get fulfilled.
♦ Considering the conditions required to be met with respect to "company" under section 6(3) and the
fact that taxable subject being foreign company and not only project office, to conclude "residential
status" based on merely activities performed in India would be incorrect as residential status is to be
determined with respect of "entity" as a whole and not for the "activities" in a particular jurisdiction.
This is further established from the fact that India follows "residence based taxation" and not
"jurisdiction based taxation".

♦ Hence, in my view, reliance placed on the "activities performed in India" to determine "residential
status" is untenable in light of provisions of section 6(3) and 6(5) in particular and systems of
taxation being adopted in India in general. Examination of "activities performed in India" is relevant
for "scope of total income" which will be subsequent step to determination of residential status.
The ITAT has also relied upon the decision of the Calcutta High Court in the case of CIV v. Bank of China (In
liquidation) [1985] 154 ITR 617/23 Taxman 46 in support of the conclusion that the control and management is
wholly within India.

(ii) Reliance on Calcutta High Court decision in the case of Bank of China by Hon'ble ITAT

The ITAT has interpreted the "control and management of affairs" in the sense of managing day to day affairs
of the project office. Further, to arrive at the said conclusion, the Hon'ble ITAT has relied upon the decision of
the Hon'ble Calcutta High Court in the case of Bank of China (In liquidation) (supra). However, there are
appearant differences in the facts of Project Office of Malaysian AE in India and Bank of China (In liquidation).
The differences are as under:

♦ Bank of China was under liquidation and by virtue of the order of the Calcutta High Court all the
assets and liabilities of the Bank of China in India were under complete control and management of
the High Court and the official liquidator was appointed in that connection.
♦ Under liquidation cases when the High Court is having complete control over all the assets there is no
possibility of control or management being existing at more than one place.
♦ Further, the Calcutta High Court ruling was more specific to the facts of company under liquidation
as against operative company. In case of company under liquidation (forced liquidation, due to India
- China being at war) the activities were absent and issue was regarding taxability of passive income
and in light of the fact that Indian authorities have exercised special powers in curtailing activities by
head office. These facts are completely missing in the case under consideration. Hence, it can be
argued that Calcutta High Court ruling is not applicable to facts under consideration before ITAT.
Foreign EPC company's modalities for execution of projects - Industry Practice:

Let us further examine the "control and management situated wholly in India" in context of the EPC industry's
operative modalities from foreign company perspective:
 ♦ The definition refers to "Control and management of its affairs is situated wholly in India", in case of
Project office, it is difficult to envisage complete control and management within India as in EPC
transactions followings are specific characteristics:
• Foreign company bid for project in India
• On being successful in getting the contract, foreign company will enter into agreement with
Indian Company or State/ Central Government or any other agencies/ authorities in India.
In the event of the contract being complete EPC i.e. which includes services as well as
supplies, generally, four separate agreements are being entered into being, On-shore
supplies, On shore services, Off-shore supplies and Off shore services.
• Generally, each of the four agreements, if they are separate, should be read separately unless
consideration of one of the agreements is depending upon/ pre-condition to some part of
services/ supplies having performed from outside India (i.e. off shore)
• For taxability, off-shore supplies and services will not be questioned as the same is not liable
to tax in India as per the Supreme Court's decision in the case of Ishikawajima-Harima
Heavy Industries Ltd v. DIT [2007] 288 ITR 408/158 Taxman 259 (SC).
• For On-shore services, generally Project Office is being established as per RBI requirements
and then the work under on-shore contract will be undertaken by itself or will be
subcontracted to some agency with supervisory activities being done through such project
office.
♦ From above narrated peculiar features of EPC contracts, it can be envisaged that even for the
activities of "Project Office" it is not possible to argue that such project office is "controlled and
managed wholly within India" as the basic decision which activities will be performed by whom and
which to have project office and when to establish project office and what is the activity profile of
project office are being determined by head office i.e. foreign company after being awarded such
contract.
♦ Further, the ownership and responsibility over the work being performed by the Project Office
remains with head office only and, hence, control or supervision also remains with the head office. In
light of these facts, to hold that even part of the control and management is not outside India seems
too difficult to prove.
♦ However, in the captioned ruling ITAT, there is no mention of the reference to such critical aspect of
the EPC contracts.
Requirement of "Control and management of its affairs situated wholly in India":

In connection with the captioned matter, the ITAT has held that the control and management of IJMII,
Malaysia is wholly situated in India:

♦ Project director is residing in India.

♦ Project director has authority for the operations/activities to be performed by Indian project
office
♦ Day to day activities had been managed from India.
However, the ITAT while deciding the "control and management is situated wholly in India" based on above
aspects, have not touched upon the following points:

♦ How and why Project office has been established - Requirement to execute project awarded to foreign
company requires formation of project office in India.
♦ Who is bearing the risk of activities of project office - Only Indian project office or even foreign
company?
♦ Who has decided what activities should be carried out by Project office itself or it should be sub-
contracted? - Board minutes at Malaysian company could have been vital to this
♦ Whether activities of Project office were subject to review by Head Office?
 ♦ Who has granted the authorities and extent of the authorities? Whether seconding of the decision
taken by Project Director is required for any function?
♦ Is there any difference in "control and management situated wholly in India" and "place of effective
control and management"?
Answers to above pointers/ questions may throw more light on certain circumstances and evidences which
could have material impact if brought out or considered in the above ruling of the Hyderabad ITAT. On perusal
of the Delhi ITAT ruling in the case of ITO v. Tianjin Tianshi India (P.) Ltd. [2011] 133 ITD 123/14
taxmann.com 130, one may observe that certain pointers as mentioned above have been raised by the
department and ITAT has held to the effect that PE of foreign company, in cases where such circumstances
exists, is non-resident in India. However, from perusal of the captioned ruling of the ITAT Hyderabad, one
cannot make out whether the ITAT had a chance to examine the above factors or not. Hence, it could have been
enriching and more insightful if the ITAT had chance to discuss the above factual aspects and their interplay
with the "residential status" of foreign company. Additionally, it is also interesting to note that in similar
circumstances the AAR (Authority for advance ruling) in the case of P. No. 13 of 1995, In re [1997] 228 ITR
487/94 Taxman 171 (AAR - New Delhi), has narrated how EPC (Engineering, Procurement and Construction)
industry functions more particularly when foreign company entered into or is awarded any such contract by
Indian company. In light of such circumstances the Hon'ble AAR has ruled that control and management of its
affairs are not situated wholly within India.

Further, according to Prof. Klaus Vogel, place of management exists where management directives are given
(including opening of project office or accepting or signing of the contracts or giving authority to someone to
undertake certain transactions) and not where they take effect. One need to understand that even the decision
whether to open a project office or not or whether to sign a contract or not or granting of certain authority to
some person for transacting some business will also be in the nature of management directive only and if such
decisions are taken at head office, one cannot rule out that not wholly but at least some part of the control and
management has existed outside india.

Further, in connection with the Hon'ble ITAT's reliance on the day to day activities being managed from within
India for determination of the residential status of foreign company, it is relevant to note the Bombay High
Court ruling in the case of Narottam & Pereira Ltd v. CIT [1953] 23 ITR 454 wherein it has been held to the
effect that central management and control of the company is of paramount importance and not the day to day
business. Further, the High Court has specifically held that to determine company's residential status, it is
important to see where controlling and directing powers functions and where is head and brain of the
company.

Further, it is accepted judicial position that in case of company, there can be more than one place of
management. The fact of the same is also evident and recognized by requirement of determination of
residential status of certain category of tax payers based on "effective place of management" under various
DTAA. Once recognizing the multiple place of management, it is important to understand that provisions of
section 6(3) require "control and management to be situated wholly in India" which is far different from
"effective place of management".

Hence, if the management and control of the foreign company have been outside India for even some part of
the year or even for some aspect of the activities or decision making, such foreign company or any form of its
presence (be it Project Office or Branch) requires to be considered as non-resident under the Act.

Further, as per provisions of section 6(5), if a person (as defined under section 2(31) of the Act) is resident for
one source of income then said person will be construed as resident for all sources of income. Considering the
said provisions and accepted judiciary principles in this regard, if PE is held to be resident, foreign company
will be considered as resident in India, as for the purpose of taxability it is the "foreign company" which is liable
to tax and not the PE and it is "foreign company" which is taxable subject as covered with the in the definition
of "person" under section 2(31) of the Act. Hence, in the event of foreign company being considered resident in
India, its global income should be taxed India.
PE has been considered as separate legal entity, as per section 92F of the Act, only for the purpose of provisions
of Chapter X of the Act which deals with the transfer pricing provisions. Further, taxing PE as person instead of
foreign company and considering PE separate from foreign company as separate person will violate the basic
charging provisions as the definition of "person" does not cover "Permanent Establishment" as oppose to
definition of enterprise as contained in section 92F of the Act.

Hence, the captioned ruling of the Hyderabad ITAT may lead to an approach whereby the provisions of section
6(5) as well as already established principles regarding "residential status" of a "person" and taxability of such
person's, in respect of income from other sources, may get violated.

To reconcile the statutory provisions on residential status and taxability, one may need to understand that
residential status is for the "person" as defined under section 2(31) of the Act as a whole. However, taxability
will only be for the income which is falling within the ambit of charging sections. If one follows the said
principle, which is almost settled, then there will not be issues of non-reconciling provisions of the Act as
highlighted in above para.

However, the ruling has given new dimension to the determination of residential status and consequently,
taxability of income of non-residents whereby one may re-look at the position taken for residential status of
various permanent establishments of a foreign company in India for taking benefit of the captioned ruling.

(ii) PE of Malaysian company should be considered as "resident" as per Article 24 of the DTAA:

The ITAT has held that as per Article 24 of the DTAA between India and Malaysia, the Project office of
Malaysian company should be considered at par with project office of any Indian company and hence should be
considered as "resident". In this regard, the Hon'ble ITAT has also placed reliance on the decision of ITAT
Ahmedabad Special Bench in the case of Rajeev Sureshbhai Gajwani v. Asstt CIT [2011] 129 ITD 145/10
taxmann.com 62.

In the Case of Rajeev Sureshbhai Gajwani (supra), the issue was with regard to computation of total income
and in which connection the Hon'ble Special Bench has held that as per Article 26 of India - US DTAA, both
(i.e. resident of India and resident of US) should be considered at part except matters covered under para 3 of
Article 7 as per the Article 26(2) of India - US DTAA. However, in the captioned matter, the ITAT has implied
approved application of "Non-discrimination" principle even for determination of "residential status" of the
company.

On perusal of the DTAA between India and Malaysia, one may observe that the said DTAA is on same principle
on which various DTAA are being signed and primarily for the avoidance of double taxation. Hence, the scope
of Article 24 of the DTAA between India and Malaysia should be construed and restricted for determination of
the income and not for determination of the residential status. Hence, said ruling of the Special Bench of the
Ahmedabad ITAT is not applicable to the facts of the case before Hyderabad ITAT and clearly distinguishable.

In this connection, it is worthwhile to note that the "non-discrimination" article refers to the discrimination
based on "nationality" or "citizenship" and as per internationally accepted principles practices, differential
treatment/requirements based on "residential status" has not been considered as "discrimination covered his
the provisions of Article relating to "non-discrimination" under the respective DTAA. DTAA between India and
Malaysia under Article 24 has specifically agreed that "same circumstances" will include in particular with
respect to residence. Hence, any differential treatment because of the "residential status" with respect to
residence will not be considered as "discrimination" which is prohibited under the captioned Article 24 of the
DTAA between India - Malaysia. DTAA between India and Malaysia has Article 24 which restricts both the
contracting States from discriminating on certain grounds. Summarily, Article 24 of India - Malaysia deals with
the following circumstances and restricts both the countries from following discrimination:

(a) Discrimination based on nationality of the tax payer

 (b) Taxation of PE of resident of other Malaysia at rate higher than taxation of resident of India. Further,
India will not be obliged to grant certain additional personal allowances or benefits which India is
granting due to civil status and/ or family responsibilities.
(c) Deductibility of fees for technical services and other payment (other than covered under Article 9,11
and 12) under the same circumstances.
(d) Enterprise which is directly or indirectly controlled by resident of Malaysia should not be treated
differently from other enterprises in similar circumstances.
In view of above, when the DTAA signed between India and Malaysia has specifically restricted applicability of
the captioned article in relation to "residence", ITAT's conclusion that treating PE of Malaysian company as
non-resident will be violation of Article 24, is devoid of merits and does not find support under the India -
Malaysia DTAA.

Further, provisions of Article 24 of the DTAA between India and Malaysia also restricting and not covering the
applicability of differential criteria for determination of "residential status" as the language used in the para - 1
of the Article 24 reads as under:

Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any
requirement connected therewith, which is other or more burdensome than the taxation and connected
requirements to which nationals of that other State in the same circumstances, in particular with respect to
residence, are or may be subjected. This provision shall, notwithstanding the provisions of Article 1, also
apply to persons who are not residents of one or both of the Contracting States. (Emphasis supplied)
Hence, application of differential criteria is not based on the "nationality" of the Malaysian company but is
based on the "place of management and control" of Malaysian company whose PE is there in India. Hence,
following internationally accepted principles and even the OECD commentary, different treatment based on
residential status should not have been considered as violation of provisions of Article 24 of the DTAA between
India and Malaysia.

(iii) Transfer pricing provisions do not apply in absence of shifting of profit outside India:

Primarily, the ITAT has decided the matter of non-applicability of transfer pricing provisions based on the
conclusion that the PE of Malaysia (Project Office) in India is resident for tax provisions in India and, hence,
transaction between the assessee company and PE of Malaysian Company are not falling within the ambit of
the "international transactions".

In addition to above and as an independent ground, the ITAT at para 5.17 to 5.19 held to the effect that in
absence of shifting of profit outside India and/or erosion of taxes in India provisions of chapter X are not
applicable. Further, to arrive at the conclusion that there is absence of shifting of profit outside India and/or
absence of erosion of tax base in India, the ITAT has relied upon the fact that the profits of PE are taxable in the
hands of PE and is separately assessed as such.

However, it is interesting to note that the ITAT has not commented or took the fact of PE being assessed as
foreign company to any further logical conclusion and the said fact has been merely quoted and restrictively
relied upon only to highlight that PE is also filing return and being assessed as non-resident company (i.e.
foreign company). It is pertinent to note that even after holding the PE as resident, the ITAT has not disturbed
or commented on why the PE of Malaysian company has been offering income as "non-resident" for all such
years including year under consideration.

Further, the Hon'ble ITAT has placed reliance on the following rulings to come to the conclusion that in
absence of shifting of profit outside India, provisions of Chapter X of the Act are not applicable.

♦ Philips Software Centre P Ltd (supra)

♦ Dresdner Bank A.G. (supra)
♦ Zydus Altana Healthcare (P.) Ltd.
(supra)
 ♦ Cotton Naturals I (P.) Ltd. (supra)
In this regard, let us examine the facts and the circumstances in light of which each of the above rulings were
delivered and its applicability to the facts of the case before Hyderabad ITAT:

♦ The facts before the ITAT's in the cases of Philips Software Centre (P.) Ltd. (supra) Zydus Altana
Healthcare (P.) Ltd. (supra) and Cotton Naturals (I) (P.) Ltd. (supra) were more or less identical. In
all these 3 cases, assessee company were entitled to claimed profit linked deduction in respect of the
income from provisioning of services from its associated enterprises and, hence, before ITAT in all
the three cases, the ground was raised regarding "need/intent/motive to shift profit outside India".
Further, considering the said fact, the ITATs have held that transfer pricing provisions do not apply
to that extent. However, in the case before Hon'ble Hyderabad ITAT the facts are different as the
assessee nor PE of the foreign company are entitled to profit linked deduction and, hence, above
three rulings are not applicable.
♦ Further, the reliance on the ruling of Dresdner Bank A.G. (supra) seems to be misplaced as the issue
under consideration was computation of income in the case of PE in India and taxability of interest
paid by branch to head office. However, on examination of the facts of the said case law in the case of
Dresdner Bank A. G. (supra), we feel that the said Mumbai ITAT ruling does not have implications
on the case under consideration.
Hence, in my humble view reliance on the above rulings were not warranted/ misplaced. However, now we may
turn to the reliance placed on the CBDT circular No. 14 of 2001 which talks about the basic intention of transfer
pricing regulations. The relevant para from the CBDT circular No. 14 of 2001 has been reproduced below:

55.5A The new provision is intended to ensure that profits taxable in India are not understated (or losses are
not overstated) by declaring lower receipts or higher outgoings than those which would have been declared by
persons entering into similar transactions with unrelated parties in the same or similar circumstances. The
basic intention underlying the new transfer pricing regulations is to prevent shifting out of profits by
manipulating prices charged or paid in international transactions, thereby eroding the country's tax base. The
new section 92 is, therefore, not intended to be applied in cases where the adoption of the arm's length price
determined under the regulations would result in a decrease in the overall tax incidence in India in respect of
the parties involved in the international transaction.

From above reproduction of relevant para of the CBDT Circular, one may notice that the CBDT has mentioned
that the framework of the statutory provisions is to "prevent" and "ensure". For the purpose of such prevention
or determination, statutory provisions need to be applied. Hence, reliance on the said circular to interpret that
department has primary onus to prove "erosion of tax base" or "shifting of profit outside India" is unwarranted.

Further, ITAT has held that there is absence of any "intent" to shift the profit when PE is being taxed in India
on its profits. In that regard, one may need to consider the following facts and circumstances before arriving at
such conclusion;

♦ PE of foreign company has got the contracts from Indian companies

♦ PE of foreign company has sub-contracted only certain portion of the work to Indian companies (i.e.
labour contract) and supplies remained non-taxable in India (Following SC ruling in the case of IHI)
♦ PE of foreign company is taxable at 40% as against indian company at 30% (excluding surcharge and
education cess)
In view of above circumstances, to hold that there is absence of shifting of profits or erosion of tax base in India
might not be right.

Without prejudice to above, if we read the provisions of Chapter X of the Act which deals with and prescribes
requirements for computation of income in accordance with the arm's length principles compliance with the
arm's length principles would be required for every transaction which satisfies following conditions:
 ♦ Two or more associated enterprises, as defined under section 92A of the Act, enter into any
transaction

♦ Such transaction is "international transaction" as per definition prescribed under section 92B of the
Act; and
♦ One or more of such "associated enterprises" entering into transaction is/ are "non-resident"
In the event of all the three conditions mentioned above being satisfied, income arising from such transaction
would be required to be computed in light of the provisions of Chapter - X of the Act.

Hence, it is evidently clear that Indian transfer pricing provisions, as contained in Chapter - X of the Act, do not
require establishing or requirement of existence of intent to shift profit outside India or requirement to
establish or proving erosion of tax base in India.

Further, Punjab and Haryana High Court in the case of Coca Cola (India) Inc v. Asstt. CIT [2009] 177 Taxman
103/309 ITR 199. has specifically ruled in context of applicability of transfer pricing provisions vis-à-vis
establishing shifting of profit outside India that there is no requirement for the revenue to establish/ show that
there is shifting of profit outside India for applicability of provisions of Chapter X of the Act. However, in that
context, the Supreme Court has without commenting on the merit of the issue has stated that the matters are
pending before various authorities and, hence, right course for the taxpayer would be to through right channel
rather than through writ petition. Hence, Supreme Court has directed all the judiciary where such matters are
pending to dispose of the relevant matters relating to the tax payer at the earliest.

Additionally, the Hon'ble Special bench of Bangalore ITAT in the case of Aztec Software & Technology Services
Ltd. v. Asstt CIT [2007] 107 ITD 141/162 Taxman 119 (SB) has held that as per the mandate of section 92(1) of
the Act, question of tax avoidance is not required to be established by for following statutory provisions.
Further, it has been held that wherever there is an "international transaction" among "associated enterprises",
income from such transaction is required to be computed having regard to the arm's length principles. Further,
Hon'ble ITAT Special Bench has held that when the language of the statute is clear and unambiguous, one is
not required to find intent of the legislature by referring to Budget Speech of Finance Minister, notes on
clauses, etc. Subsequently, the taxpayer has filed an appeal before the Karnataka High Court against the said
order. In that regard, the Karnataka High Court by dismissing appeal filed by the tax payer has confirmed the
said order of the ITAT Special Bench including on the issue of applicability of transfer pricing provisions in
absence of intent or without establishing shifting of profits outside India.

From above, it is evidently clear that judiciary has already accepted the proposition that it is not a pre-requisite
for tax authorities to establish shifting of profit outside India for applicability of the transfer pricing regulations
in India. Additionally, the provisions of Chapter X of the Act also indicates that the applicability of profits of
transfer pricing does not require establishing shifting of profit outside India on the part of the tax payer,
however, in turn the primary onus is put on the tax payer to show compliance when the transaction falls within
the ambit of "international transaction".

In view of above, to hold a transaction out of the purview of provisions of chapter X of the Act only on the
ground that the PE is also filing return of income in India and keeping very low or Nil margin is contrary to the
provisions of the Income-tax Act, 1961 in light of followings:

♦ Income-tax Act, 1961 prescribes applicability of provisions of Chapter X irrespective of the fact
whether the taxpayer has filed return of income or not.
♦ Transfer pricing provisions also apply to determine whether the transactions are at arm's length price
or not and the primary onus for compliance with the captioned provisions are with taxpayer and not
with the tax officials. Hence, there is no statutory requirement to show that there is shifting of profits
outside India/ erosion of tax base of India for applicability of transfer pricing provisions.
 ♦ A transaction when entered into between one or more non-resident requires examination from both
the transacting parties' perspective. Indian tax authorities have not given recognition to the fact of
economic double taxation for transfer pricing matters. Further, even the statutory provisions provide
for only upward adjustment and restrict application of transfer pricing provisions where such
application results in reduction in taxable income of the tax payer.
♦ Even though the transaction being same, adjustment can be possible in both the transacting parties'
cases as arm's length price of the transaction will be examined from both the transacting parties'
cases separately.
♦ Indian transfer pricing provisions do not allow consequential adjustment in another party's (i.e. AE's)
income computation even if both the parties to the transaction are liable to tax in India as the
adjustment to income is restricted only to the upward adjustment as per the provisions of Section 92.
In view of above, argument of establishing of shifting of profit outside India should not be taken as basic
premise for applicability of transfer pricing provisions in India. Hence, to delete the transfer pricing
adjustment/approving a transaction which is principally not in compliance with arm's length principles only
for the reason of apparent "intent/motive" to shift profit outside India, will make transfer pricing provisions
redundant to great extent.

Further, absence of requirement to examine "intent/motive" can also be observed from the fact that when the
provisions of Chapter X has been amended to expand its scope to certain specified domestic transactions, the
legislation has been worded in such a manner that for applicability of the transfer pricing provision there is no
requirement to prove that there is "shifting of profit" or "erosion of tax base". This is more important
particularly in light of the fact that when the amendment is being made in Income-tax Statute at the instance
and recommendation of the Supreme Court. However, while implementing such recommendation, the
legislators have ignored the observation of the Supreme Court to the fact that transaction between "related
parties" will not have any impact if both the entities are paying taxes on its income at full rate and the
transaction is tax neutral for revenue. However, from the present scheme of transfer pricing provisions as
applicable on the specified domestic transactions, we can observe that the said recommendation to Supreme
Court is absent and transfer pricing provisions are applicable to all covered Specified domestic transaction
whether or not there exists any tax leakage.

In view of above, in my view when the statutory provisions are clear and unambiguous, one may not succeed at
higher appellate authority based on the contention of "intention" of the statutory provisions. Hence, in my
view, the Hon'ble ITAT's view of non-applicability of transfer pricing provisions to assessee when there is no
"intent/ motive" to shift profit outside India may face review by higher appellate authority in coming time.
However, till then this captioned ruling is surely helpful and may turn out to be savior for many taxpayers.

Summarizing

3. The ruling of Hyderabad ITAT in the case of IIJM India Infrastructure Ltd. (supra) has given certain new
dimensions to the interpretation of practical scenarios and hence important.

♦ This is the remarkable ruling wherein the PE of the operating foreign company (unlike Bank of China,
where cases were far from comparable) is held as "resident". However, in my personal opinion,
ITAT's view on certain facts and characteristics of operations (which are common for execution of
such EPC contracts) of PE could have made some difference.
♦ In this ruling ITAT has held that "residence" can also be considered as one of the ground on which
taxpayer can ask for relief under "Non-discrimination" under DTAA. Considering the cascading effect
of the said interpretation, one can assume that this ruling of the Hon'ble Hyderabad ITAT is going to
be savior for many tax payers in coming days.
 ♦ This ruling is remarkable when the ITAT has applied principle of "intention to shift profit OUTSIDE
India" in cases where taxpayer is not eligible for any income linked deductions (as case laws relied
upon by the taxpayer in support of this argument were on different facts and circumstances as
compared to the facts of the taxpayer. Assessee in respective cases, as relied upon by assessee
company, were eligible and claiming income linked deduction in those cases). Further, filing of return
of income in India has been given cognizance which will be very significant aspect as ITAT has done
away with the normally perceived "erosion of tax base" due to differential tax rate of 40% as against
30% in this case.
In view of above summarized points, the captioned ruling of the Hyderabad ITAT ruling will have far reaching
impact and considering the fact of the ruling being in favour of taxpayer, we may see more reliance on this
captioned ruling in time to come by other taxpayers too.

■■