Facts of the case
Cummins Inc. ["the taxpayer"] is a foreign company, rendering services in respect of desktop/laptop software license and internet mail facilities to its Indian associated enterprises ("AEs"), i.e. CIL and CSSL which were paying IT charges provided by the taxpayer.
During assessment year under review, the Transfer Pricing Officer ("TPO") determined the arm's length price of the aforesaid receipts of the taxpayer based on the method of cost allocation using actual costs. The In this regard, the taxpayer was of the view that allocation of costs based on cost estimates is an accepted allocation mechanism by OECD TP Guidelines and the additions made by TPO would result in deterioration of overall India tax base. The TPO while making aforesaid addition, also ignored the fact that the percentage variation in cost estimates and cost variations were not material and the same less than 5% as provided in under section 92C of Income-tax Act, 1961 ("the Act"). The Commissioner of Income tax Appeal ("CIT [A]") confirmed the additions made by TPO. In view of the same, the taxpayer is in appeal before the Income-tax Appellate Tribunal ("the ITAT"/ "the Tribunal").
Ruling of the Tribunal
During course of proceedings, following was observed by the Tribunal:
- No adjustment can be made in
case of reduction of tax base in India
The Tribunal stated that the addition made by the TPO by using actual cost method dictated to recover more from the Indian concerns. Alternatively, the taxpayer recovering more money from its Indian AEs would result in reducing the overall tax base of India which eventually would result in violation of the provision of Section 92(3) of the Act. Based thereon, the Tribunal reversed the order of CIT(A) and directed the TPO to delete the adjustment made in this regard.
Nangia's Take
While analyzing the applicability of provision of Section 92(3) of the Act, the ITAT did not consider the findings of the Kolkata Tribunal in the case of Instrumentarium Corporation Ltd Vs ADIT [ITA Nos. 1548 and 1549/Kol/2009] wherein the tax base erosion theory was analyzed from Indian perspective. The Tribunal, in the aforesaid case, viewed the concept of "base erosion" in the light of Indian tax legislation rather than considering an overall holistic view in relation to the taxability of the taxpayer and its AEs in India. It is held that none of the provisions of Indian tax legislation provides for any circumstances which support a corresponding deduction in the hands of Indian AEs in the event if the new income is brought to tax in the hands of taxpayer. The ITAT, in the instant case, however, remained completely silent on the concept of "correlative adjustment provisions".
Source: Cummins Inc Vs Assistant Director of Income Tax [ITA No. 2181/PN/2013]
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