Transfer pricing provisions were introduced in India by the Finance Act 2001 so as to protect its rights to collect fair share of tax in respect of cross border transactions. Accordingly an international transaction entered into between associated enterprises at a price which doesn’t conform to the arms length principles, and which results in understatement of income in India will be hit by transfer pricing provisions.
Where the assessing officer is of the opinion that the prices charged in international transactions have not been determined on arms length principles, the Assessing Officer may determine the arms length price himself or, under specified circumstances, by making reference to transfer pricing officer.
Where the arms length price determined by the Assessing Officer is different than what the taxpayer has disclosed, the Assessing Officer will compute the taxable income of the taxpayer on the basis of arms length price determined by him.
Determination of arms length price often presents practical difficulties because the said price can be calculated on the basis of several specified methods.
The Central Board of Direct Taxes realising practical difficulties has issued a circular (Circular No.12 of 2001 dated 23/8/2001) which states, “This is a new legislation. In the initial years of its implementation, there may be room for different interpretations leading to uncertainties with regard to determination of arm’s length price of an international transaction. While it would be necessary to protect our tax base, there is a need to ensure that the taxpayers are not put to avoidable hardship in the implementation of these regulations.”
The Board has also prescribed rules 10A to 10E in the Income-tax Rules, 1962, giving the manner and the circumstances in which different methods would be applied in determining arm’s length price and the factors governing the selection of the most appropriate method.
The Board has also allowed a margin in the adjustment to the arms length price. Which reads as: “The Assessing Officer shall not make any adjustment to the arm’s length price determined by the taxpayer, if such price is up to 5 per cent. less or up to 5 per cent. more than the price determined by the Assessing Officer. In such cases the price declared by the taxpayer may be accepted.”
The margin of 5 per cent is to be applied to the arm’s length price determined by the A.O, and not to the margin of profit calculated by him. Thus, if arms length price determ-ined by A.O is 100,the tax-payer is entitled to take arm’s length price in the range of 95 to 105.
The above issue arose in a recent case of ACIT Vs SDRC India Private Ltd. decided by ITAT Delhi on 6/3/2009 in respect of transactions between SDRC USA and its Indian subsidiary. In the said case, the Indian subsidiary earned income on account of software development services rendered by it to its parent company.
The agreement between them provides that in consideration for the software development services the US company shall pay the Indian company an amount equal to the cost of providing development services plus a mark up of 5 per cent.
The Assessing officer did not accept the mark up of 5 per cent, he made an addition to income by increasing the mark up to 10per cent. The Hon’ble Tribunal relying on the CBDT circular no.12 held that the addition made by the Assessing Officer by increasing the mark up to 10 per cent was not correct and accordingly the addition made by Assessing Officer was deleted.
The aforesaid decision will provide an authority that an Assessing Officer should not make any adjustment to the arms length price determined by a the taxpayer if such price is upto 5per cent less or upto 5 per cent more than the price determined by the Assessing Officer. The circular of the Board is clear that in such cases the price declared by the taxpayer should be accepted.
Wednesday, March 25, 2009
Tuesday, March 24, 2009
Charitably liberal
There is no exact line of demarcation between religion and charity. Section 11 of the Income-Tax Act, however, gives blanket exemption in respect of income from property held under trust meant wholly for charitable or religious purposes. If the statute had used the expression ‘and’ in place of ‘or’, much of confusion in the last five decades relating to taxation of charitable and religious institutions would not have arisen.
Whether the expression was used deliberately or by oversight could not be stated with definiteness. Partly charitable
Section 11(1)(b) says that property held by a trust established before the commencement of the I-T Act, 1961 meant partly for charitable or religious purposes is also eligible for exemption. By this it is implicit that a trust ‘partly’ meant for charitable/religious purposes could not get tax exemption if it was created after the enactment of the statute.
Section 11(1)(a) provides exemption to only wholly religious or wholly charitable institutions and it is explicit because, it was presumed so by the public at large.
In Calicut Islamic Cultural Society vs Assistant CIT (2009 28 SOT 148 Cochin), the tribunal decided a case where the trust had mixed both charitable and religious objects in one entity. The trust was established to develop and manage madrassas, mosques, etc., being religious in nature and also had the objective of running schools, hospitals, etc., being charitable in character. The assessing officer (AO) denied the exemption since the activities of charity and religion were mixed up in the trust. The CIT (Appeals) also approved the stand of the AO.
The taxpayer contended that expenditure on maintenance of mosques did not affect its dominant and multifarious activities and even if maintenance of mosque is taken as not charitable it is ancillary or incidental to the primary and dominant objects of the trust.
Also, it was contended that the expression ‘in part’ appearing in Section 11(1)(b) does not refer to an aliquot part and it should be understood to apply to cases enabling the trustees to utilise funds for non-charitable purposes.
The tribunal held that once the registration is granted by the Commissioner, the AO cannot probe the objects and purposes of the trust which fall in the exclusive domain and jurisdiction of the Commissioner by following the precedent in the Assistant CIT vs Surat City Gymkhana (2008 300 ITR 214 SC). The tribunal disapproved the act of the AO who had gone into investigating and probing the basic objects of the trust.
A precedent as regards eligibility for tax exemption in the case of partly religious and partly charitable trust could be found in Ghulam Mohidin Trust vs CIT (2001 248 ITR 587 J&K). In this case, the objectives of the trust were partly charitable and religious, and gave absolute discretion to the trustees to apply the income of the trust. No definite portion of income was allocated to charitable purposes. The court hence held that since the trust was partly charitable and partly religious — it was not eligible for tax exemption.
Distinction
While deciding Calicut Isalmic Cultural Society case, the tribunal distinguished the High Court decision and held that the benefits of the trust were open to all without restriction to particular religious faith or community.
Whereas in the Ghulam Mohidin Trust case absolute discretion was given to the trustees for application of income, and the trust was intended to promote science and technology and Muslim theology among Muslim intelligentsia.
By drawing this distinction, the tribunal held that a single entity having mixed both religious and charitable activities could still be eligible for tax exemption prescribed in Section 11.
Since the dividing line between charity and religion is so thin and is quite often blurred, the decision of the tribunal and its liberal interpretation opens a new area of controversy notwithstanding it is beneficial to taxpayers. The law makers have to take note of this novel interpretation while drafting or rewriting the legal provisions, to reduce streams of cases coming up for adjudication.
Whether the expression was used deliberately or by oversight could not be stated with definiteness. Partly charitable
Section 11(1)(b) says that property held by a trust established before the commencement of the I-T Act, 1961 meant partly for charitable or religious purposes is also eligible for exemption. By this it is implicit that a trust ‘partly’ meant for charitable/religious purposes could not get tax exemption if it was created after the enactment of the statute.
Section 11(1)(a) provides exemption to only wholly religious or wholly charitable institutions and it is explicit because, it was presumed so by the public at large.
In Calicut Islamic Cultural Society vs Assistant CIT (2009 28 SOT 148 Cochin), the tribunal decided a case where the trust had mixed both charitable and religious objects in one entity. The trust was established to develop and manage madrassas, mosques, etc., being religious in nature and also had the objective of running schools, hospitals, etc., being charitable in character. The assessing officer (AO) denied the exemption since the activities of charity and religion were mixed up in the trust. The CIT (Appeals) also approved the stand of the AO.
The taxpayer contended that expenditure on maintenance of mosques did not affect its dominant and multifarious activities and even if maintenance of mosque is taken as not charitable it is ancillary or incidental to the primary and dominant objects of the trust.
Also, it was contended that the expression ‘in part’ appearing in Section 11(1)(b) does not refer to an aliquot part and it should be understood to apply to cases enabling the trustees to utilise funds for non-charitable purposes.
The tribunal held that once the registration is granted by the Commissioner, the AO cannot probe the objects and purposes of the trust which fall in the exclusive domain and jurisdiction of the Commissioner by following the precedent in the Assistant CIT vs Surat City Gymkhana (2008 300 ITR 214 SC). The tribunal disapproved the act of the AO who had gone into investigating and probing the basic objects of the trust.
A precedent as regards eligibility for tax exemption in the case of partly religious and partly charitable trust could be found in Ghulam Mohidin Trust vs CIT (2001 248 ITR 587 J&K). In this case, the objectives of the trust were partly charitable and religious, and gave absolute discretion to the trustees to apply the income of the trust. No definite portion of income was allocated to charitable purposes. The court hence held that since the trust was partly charitable and partly religious — it was not eligible for tax exemption.
Distinction
While deciding Calicut Isalmic Cultural Society case, the tribunal distinguished the High Court decision and held that the benefits of the trust were open to all without restriction to particular religious faith or community.
Whereas in the Ghulam Mohidin Trust case absolute discretion was given to the trustees for application of income, and the trust was intended to promote science and technology and Muslim theology among Muslim intelligentsia.
By drawing this distinction, the tribunal held that a single entity having mixed both religious and charitable activities could still be eligible for tax exemption prescribed in Section 11.
Since the dividing line between charity and religion is so thin and is quite often blurred, the decision of the tribunal and its liberal interpretation opens a new area of controversy notwithstanding it is beneficial to taxpayers. The law makers have to take note of this novel interpretation while drafting or rewriting the legal provisions, to reduce streams of cases coming up for adjudication.
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