Sun’s default under transfer pricing not to affect treaty entitlement
The Income Tax Appellate Tribunal (Mumbai Bench) recently pronounced its order in the appeal filed by the Income Tax Department (“Revenue”) in the case of DDIT v. M/S Sun Chemicals B.V. (“Sun Chemicals”) concluding that a default by a non-resident relating to the Indian transfer pricing regulations does not disentitle such non-resident from claiming the benefits under a tax treaty.
Sun Chemicals is a company incorporated in Netherlands and is a leading supplier of graphic arts products. It had acquired the shares of Coates of India Ltd. in two tranches on April 20, 2000 and on June 29, 2001. These shares were subsequently sold by Sun Chemicals on September 21, 2001. While there was a long term capital loss in relation to the shares acquired on the earlier date, there was a short term capital gain earned from the transfer of shares acquired on June 29, 2001. The net capital loss declared by Sun Chemicals in the return filed was Rs. 1,51,67,050/-.
Subsequently questions arose regarding the calculation of the transfer price at an arm’s length price as the shares were acquired from an associate enterprise and the Assessing Officer determined that there was a short term capital gain of Rs. 15,06,11,574/- by taking the cost of the shares as Rs. 73/- per share as compared to Rs. 113.19 per share paid by Sun Chemicals. Further, the Assessing Officer denied Sun Chemicals the benefit under the India-Netherlands Double Tax Avoidance Agreement (“Treaty”). If the Treaty were applied, as per Article 13(5) of the Treaty the capital gains arising in the hands of Sun Chemicals would only be taxable in Netherlands and the same would not be taxed in India.
Facts in Picture
Contentions of the Revenue
It was the Revenue’s contention that Treaty benefits should not be allowed to Sun Chemicals on the ground that the definition of ‘tax’ as per the Treaty1 shall not include any amount which is payable in respect of any default or omission in relation to the taxes to which the Treaty applies. This imposes a responsibility on Sun Chemicals to disclose its correct income and not resort to default/omission while determining the tax. The Revenue submitted that Sun Chemicals has, by not disclosing the fact of purchase of shares from an associate enterprise, and secondly, by not disclosing the arms length price in respect of the purchase transaction has resulted in contravention of section 92C of the ITA. Therefore the benefit of the Treaty is not available to Sun Chemicals. The Revenue, making another point to support their stand, pointed out that under the provisions of the Treaty, benefit can be availed by honest and tax compliant entities only.
Contentions of Sun Chemicals
The counsel for Sun Chemicals contended that Sun Chemicals is entitled to the benefit of the Treaty in terms of section 90(2) of the ITA as laid down by the Supreme Court in the Azadi Bachao Andolan case2. The ruling in the case of Vanenburg Group B.V. vs. Commissioner of Income-tax3 was also relied upon. it was contended that (i) no capital gains arises to a resident of Netherlands on the transfer of shares in the course of business re-organisation; (ii) since no capital gains arises in India, Sun Chemicals is not required to file the return of income in India; and (iii) since the transfer pricing provisions contained in the Income Tax Act, 1961 (“ITA”) are machinery in nature, the same would not apply to Sun Chemicals in absence of taxable income in India.
The tribunal held that the default or omission are restricted to those which are related to tax and therefore, scope of default or omission cannot be extended to default or omission qua the provisions relating to the determination of total income of Sun Chemicals, including the determination of the arms length price under the ITA. The tribunal also rightly upheld the fact that the words 'default or omission in relation to taxes’ in the definition of the term ‘tax’ would include any amount of interest payable by the taxpayer. Thus, it was concluded that the default or omissions relating to the provisions of section 92 to 92F of the ITA are not covered by the default or omission mentioned in Article 3(d) of the Treaty and consequently the appeal of the Revenue stood dismissed.
1 Article 3(d) of India-Netherlands Treaty: “the term: tax means the Indian tax or the Netherlands tax, as the context requires, but shall not include any amount which is payable in respect of any default or omission in relation to the taxes to which this Convention applies or which represents a penalty imposed relating to those taxes.”