Finance Bill, 2009 has introduced certain amendments in the transfer pricing provisions. The primary amendments are the introduction of the concept of ‘Safe Harbour Rules’ and ‘Alternate Dispute Resolution’(‘ADR’) mechanism.
The Finance Bill 2009 proposes to introduce ‘Safe Harbour’ rules by empowering Central Board of Direct Taxes, an apex tax administrative body (‘CBDT’) to frame such rules.
The concept of ‘Safe Harbour’ suggests that the results declared by the taxpayer who fulfill the prescribed conditions are accepted without detailed scrutiny.
Though the ‘Safe Harbor’ provisions provide a degree of certainty to taxpayers, particularly to non-residents investing in India, but the international community is divided on account of demerits associated with it, viz, difficulty in quantification of safe harbor, acceptance of safe harbor rules by one jurisdiction in another jurisdiction which may give rise to double taxation, create tax planning opportunities, and raise the specter of discrimination and distortion of competition.
In view of above, it is expected that the CBDT would give due consideration to all aspects associated with the ‘Safe Harbour’ rules before notifying the same.
Clause 55 of the Finance Bill 2009 has proposed to introduce a new section 144C under the Income Tax Act, 1961 (‘Act’) providing the mechanism of ADR akin to the concept of ‘Advance Pricing Mechanism’.
The initial reading of the fine print suggests that only eligible assessee would be governed with the provisions of ADR mechanism.
An eligible assessee has been defined as any person in whose case the variation is made as a consequence of the order of the Transfer Pricing Officer under section 92CA(3) of the Act and such person should be a foreign company.
Therefore, the contemplated ADR provisions has been made applicable only in case of foreign companies in which adjustment under section 92CA(3) has been made. At this juncture, it is not free from doubts whether assessees other than foreign companies have not been covered within the ambit of the Section 144C of the Act.
The proposed provision requires the Assessing Officer to forward a draft order of assessment to the eligible assessee if he proposes to make any variation in the income or loss returned which is prejudicial to the interest of such assessee. Further, the Assessment Order passed under section 143(3) of the Act in pursuance of directions of ADR suggests that the same is not appealable.
Further, clarity is required on the scope of income proposed to be covered by the contemplated provisions of section 144C. The Notes to clauses of Finance Bill, 2009 states that the provisions of Section 144C are proposed to cover only of transfer pricing adjustments of the eligible assessee only.
However, the draft provisions of section 144C as per Finance Bill 2009 intend to cover all incomes of the eligible assessee.
The envisaged measures are step in the right direction, the orderly implementation thereof shall only ensure that desired objectives are met. Till such time it happens, one can only applaud the initiatives proposed.
(Aseem Chawla is Partner, Tax Practice Group and Amit Singhania is Senior Consultant, Tax Practice Group at Amarchand & Mangaldas & Suresh A. Shroff & Co).
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