AAR: Income not chargeable to tax are also covered under TP provisions

Recent ruling by Advance Ruling Authority (‘AAR’), dated August 14, 2012, in case of Castleton Investment Limited [A.A.R. No.999 of 2010] came as a surprise to many stake holders on applicability of transfer pricing.

Though the ruling was on other issues as well but this write-up is limited to the issue pertaining to applicability of transfer pricing provision in India.

The Applicant, M/s Castleton Investment Limited of Mauritius (‘CIL’), raised a question that if the transfer of shares by the applicant to its associated enterprise is not taxable, whether the provisions of section 92 to section 92F of the Act relating to transfer pricing would be applicable? In response to the same AAR observed that the applicability of section 92 does not depend on the chargeability under the Act. The only saving grace is that the judgement is only applicable in on that applicant and on that transaction for which it is sought.

Facts of the Case

Glaxo Smithlkine Pharmaceuticals Limited (GSKPL) is a company incorporated in India. The applicant had acquired 600,000 shares in it in the year 1993. It also acquired 1,680,170 shares in Burroughs Wellcome (India) Limited (‘BWL’) in the year 1996. GSKPL and BWL merged.  In the year 2004, the applicant received in lieu of the shares held by it in BWL, shares in GSKPL. These shares were held as investment in the books of CIL. As a part of reorganization, CIL propose to transfer shares held in GSKPL to its associated enterprise, Glaxo Smithlkine (Pte) Limited.

On transfer of shares, AAR observed that any capital gain arising from such transfer would not be taxable in India.

Question

Whether the provisions of section 92 to section 92F of the Act relating to transfer pricing would be applicable?

Observation of AAR

It is not material that the gain or income is taxable in the country or not, section 92 to 92F would apply if the transaction is one coming within those provisions. In case, where there is no liability what would be the purpose of undertaking a transfer pricing exercise is not a question that would affect the operation or rigour of a statutory provision on its plain word. There is nothing to show in transfer pricing provisions that the expression ‘income’ has to be given a restricted meaning and the applicability of section 92 does not depend on the chargeability under the Act. 

Comment

This ruling of AAR will only going to create confusion in the minds of taxpayer and consultant. It is quite strange to observe that AAR has disregarded its earlier ruling in the case of Praxair Pacific and Vanenburg Group BV. A view that transfer pricing provisions are applicable even on those transactions wherein income is not taxable in India, is like a shaft without arrowhead. 

------------------------------

In case if you have any query on transfer pricing related issues, please feel free to write to us at gaurav@jgarg.com

Best Regards

CA Gaurav Garg

JGarg Economic Advisors

www.jgarg.com