IJM (India) Infrastructure Ltd vs. ACIT (ITAT Hyderabad)

Transfer Pricing provisions do not apply if the AE is assessed in India & there is no chance of shifting of profits outside India or erosion of tax base

The transaction between the assessee (an Indian company) and IJM-IJMII JV and IJM Corporation, Berhard, Malaysia and IJM-NBCC-VRM (JV) between National Building Construction Co. Ltd., VRM and the assessee does not fall u/s 92B(2) for the following reasons:

(i) The AE, IJM Corporation Berhad, has a Project Office at Delhi which constitutes a PE. The AE has established a place of business in India u/s 592 of the Companies Act, 1956. As the principal company had executed a Power of Attorney in favour of the Indian resident Director to manage the branch operations in India, it was established beyond any doubt that the entire control and management in relation to operations in India is situated in India. Consequently, the PE has to be assessed as a “resident” u/s 6(3)(ii);

(ii) Moreover, under the provisions of the DTAA with Malaysia, a PE is treated as a separate legal entity, independent of its foreign principal enterprise. Further, Article 24 of the DTAA contains a non-discrimination provision. It prohibits a Contracting State from making any discrimination in the matter of taxation between its own national and a national of the other Contracting State, who are placed in similar circumstances. In other words, a Contracting State is obliged to provide the same tax treatment to a national of the other Contracting State as it would give to its own nationals. Article 3(h) of the DTAA defines the term “national” to include both-natural persons and artificial persons, such as companies, etc. Therefore, a PE should be treated as resident in India inasmuch as the business profits attributable to PE are taxable in India and all business decisions relating to the PE are entered and concluded in India. Treating PE as a non-resident amounts to violation of Article 24 of DTAA with Malaysia;

(iii) IJM-IJMII JV (Joint Venture between the assessee and IJM Corporation Berhad, Malaysia and IJM-NBCC-VRM (Joint Venture between National Building Construction Co. Ltd., VRM and the assessee) are also residents. These JVs are formed in India by an agreement between the respective parties and assessed in the status of AOP. U/s 6(2) an AOP is “resident” in India in every case except where during that year the control and management of its affairs is situated wholly outside India. Also, Article 4 of the DTAA provides that a person which includes AOPs shall be deemed to be residents of the State in which its place of effective management is situated. The JV agreements provide that all decisions relating to the JV are taken in India. The Revenue has not brought any evidence on record suggesting that these AOPs are controlled from Malaysia. Whereas the assessee led the conclusive evidence on record to show that the AOPs are residents in India;

(iv) The object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India as is brought out by Morgan Stanley 292 ITR 416 (SC) & Circular No. 14 to the Finance Act 2001. In the present case, there is no possibility of shifting of profits outside India or erosion of country’s tax base because the PE profits of the AE are assessable to tax in India. Therefore, the transactions with the AEs are outside the purview of the transfer pricing regulations.