Transfer Pricing Indian Counterpart of AE Incurring Expenditure to Promote Own Manufactured Products—Whether Amount to International Transaction

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The Tax Publishers International Taxation--Transfer Pricing Indian Counterpart of AE Incurring Expenditure to Promote Own Manufactured Products--Whether Amount to International Transaction Akhilesh Kumar Sah While analyzing the scheme of the Income Tax Act, 1961 (for short, the Act') pertaining to transfer pricing, contained in Sections 92 to 92F of the Act, it can be noticed that these provisions cover inter-group cross-border transactions w.e.f. 1-4-2001. These provisions prescribe that income arising from international transactions between associated enterprises (the AEs) should be computed having regard to the arm's length price (ALP). Expenditure by Indian counterpart of a foreign company has remained controversial issue in international taxation. 1. Introduction The law permits registration and pursuing its business independently to even an entity which is 100% subsidiary of a foreign entity. The law-makers in their wisdom, aiming at generation of taxable income, establishment of infra-structure facilities, provision of best quality goods and services to its people at a competitive price, and for generation of more employment, inter alia, have permitted multi-national enterprises to operate from Indian soil. The Act takes care of all such situations which are created through deliberate transactions to decrease the incidence of tax in India by transferring the same to a foreign jurisdiction. In this regard Chapter X of the Act has been enacted which comprehends all possible situations and provides all sorts of tools and techniques to check avoidance of tax payment in India. But, one cannot and should not be carried away by any such subjective idea which does not fit in the parameters of the Act. The allowance for any expense or interest arising from an international transaction has also to be determined having regard to ALP. The Act defines an 'international transactions', 'associated enterprises' and 'arm's length price'. The Indian tax-authorities, generally, do not believe that domestic transactions will erode Indian tax base because any shifted income is ultimately subjected to tax in India. The Chapter X of the Act talks about and aim at checking 'avoidance of tax', which is not considered in the case of domestic transactions. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X of the Act is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. The Indian entity would be entitled to claim such expenses as revenue expense in terms of Section 37 of the Act. It is not for the Revenue to dictate to an entity how much it should spend on advertisement, marketing and promotional expenses (for short, 'AMP'). That would be a business decision of such entity keeping in view its exigencies and its perception of what is best needed to promote its products. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

International Taxation--Transfer Pricing

Indian Counterpart of AE Incurring Expenditure to Promote Own Manufactured Products--Whether Amount to International Transaction

Akhilesh Kumar Sah

While analyzing the scheme of the Income Tax Act, 1961 (for short, the Act') pertaining to transfer pricing, contained in Sections 92 to 92F of the Act, it can be noticed that these provisions cover inter-group cross-border transactions w.e.f. 1-4-2001. These provisions prescribe that income arising from international transactions between associated enterprises (the AEs) should be computed having regard to the arm's length price (ALP). Expenditure by Indian counterpart of a foreign company has remained controversial issue in international taxation.

1. Introduction

The law permits registration and pursuing its business independently to even an entity which is 100% subsidiary of a foreign entity. The law-makers in their wisdom, aiming at generation of taxable income, establishment of infra-structure facilities, provision of best quality goods and services to its people at a competitive price, and for generation of more employment, inter alia, have permitted multi-national enterprises to operate from Indian soil. The Act takes care of all such situations which are created through deliberate transactions to decrease the incidence of tax in India by transferring the same to a foreign jurisdiction. In this regard Chapter X of the Act has been enacted which comprehends all possible situations and provides all sorts of tools and techniques to check avoidance of tax payment in India. But, one cannot and should not be carried away by any such subjective idea which does not fit in the parameters of the Act.

The allowance for any expense or interest arising from an international transaction has also to be determined having regard to ALP. The Act defines an 'international transactions', 'associated enterprises' and 'arm's length price'. The Indian tax-authorities, generally, do not believe that domestic transactions will erode Indian tax base because any shifted income is ultimately subjected to tax in India. The Chapter X of the Act talks about and aim at checking 'avoidance of tax', which is not considered in the case of domestic transactions.

The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X of the Act is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment.

The Indian entity would be entitled to claim such expenses as revenue expense in terms of Section 37 of the Act. It is not for the Revenue to dictate to an entity how much it should spend on advertisement, marketing and promotional expenses (for short, 'AMP'). That would be a business decision of such entity keeping in view its exigencies and its perception of what is best needed to promote its products.