| Need for advance rulings in transfer pricing issues | |
| H P Aggarwal / New Delhi June 29, 2009, 0:57 IST | |
The concept of Advance Rulings was introduced in India in 1993. For this purpose a statutory body called The Authority for Advance Rulings (AAR) was constituted. As explained by AAR on its website:
"In order to provide the facility of ascertaining the Income-tax liability of a non-resident, to plan their Income-tax affairs well in advance and to avoid long drawn and expensive litigation, a scheme of Advance Rulings has been introduced under the Income-tax Act, 1961. Authority for Advance Rulings has been constituted. A non-resident or certain categories of resident can obtain binding rulings from the Authority on question of law or fact arising out of any transaction/proposed transactions which are relevant for the determination of his tax liability."
The Advance Ruling can be sought on any question of law or fact in relation to a transaction which has been undertaken, or which is proposed to be undertaken by the non-resident in India. Likewise, Advance Ruling can also be sought by a resident in relation to the tax liability of a non-resident arising out of a transaction between the resident and the non-resident. However the AAR is prohibited in pronouncing any ruling on a question which involves determination of Fair Market Value of any property.
Thus the facility of Advance Ruling has been introduced to assist non-residents in determining their tax liability in India well in advance. As explained the benefits of Advance Ruling are explained as under:
Helps the applicant in planning his income-tax affairs well in advance.
Brings certainty in determining the tax liability.
Helps avoiding long drawn and expensive litigation.
It is inexpensive, expeditious and binding.
After introduction of Advance Ruling provisions, the Government also inserted provisions relating to Transfer Pricing. The ingredients of Transfer Pricing are: An International transaction;
entered into between two or more associated enterprises;
at a price which does not conform to the arm’s length principles;
and which results in understatement of income in India; and/or
excessive allowance for any expense or interest in India; and /or
inappropriate apportionment to any cost or expense in India.
Where an Assessing Officer finds that an international transaction hasn’t been entered into at Arm’s Length Price (ALP), he is empowered to make an addition to the income of a tax payer.
After introduction of Transfer Pricing provisions, the possibility of dispute between non-residents and tax department has very substantially increased. The role of AAR to resolve such disputes has become very important.
But, it appears that advance ruling does not provide any effective remedy for any advance determination of Arm’s Length Price to avoid possible dispute with the tax department. Whereas an advance ruling could be sought with regard to the interpretation of the transfer pricing law itself, or in respect of factual matters, such as whether a transaction will be covered by transfer pricing regulations, or to seek clarity on the specific documentation required to be maintained by the tax payer, the AAR will not entertain applications which seek clarity on whether a particular price is an appropriate Arm’s Length Price or not.
The Authority has declined to entertain the question requiring determination of ALP in a case, for instance, where loan was given without charging interest.[Instumentarium Corporation, 274 ITR 083]. Likewise, in case of Morgan Stanley & Co. 284 ITR 260, the authority declined to rule on an appropriate method for determination of ALP on the ground that the ruling will involve determination of fair market value of the property, which is outside the purview of the Authority.
In the above context, it is felt that the Government should review restriction placed by it on determination of Fair Market Value by the AAR. In fact in several countries in the context of Transfer Pricing, the system of Advance Pricing Agreements prevails, which in principle is similar to advance ruling by AAR in India.
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