Introduction
We are aware that foreign exchange regulations are governed by Reserve Bank of India (˜RBI™) and income tax regulations by the Central Government. Yet, is it possible to conclude that limits laid down by RBI can be considered as Arm™s Length Price (˜ALP™) for the purposes of transfer pricing under the under Income tax Act (˜Act™)? In the light of recent decisions under the Act, we shall delve into the status accorded to RBI regulations under the Act.
Analysis
- M/s. ThyssenKrupp Industries India Pvt. Ltd. v. ACIT (ITA No.6460/ Mum/ 2012) dtd 27.02.2013 The assessee executed a collaboration agreement with its Associated Enterprise (˜AE™) for payment of 2% of contract value for manufacturing, drawing and engineering services and 5% of the selling price as royalty. These rates were accepted as Arm™s Length Price (˜ALP™) on the grounds that they were supported by RBI™s specific or automatic approval. This decision does not consider the earlier decisions of SKOL Breweries and Nestle (discussed below) which are in contrast.
- Though currently royalty and lump-sum payments overseas under technical collaboration agreements do not require the approval of the ministry of commerce and industry, the moot point is whether limits laid out under RBI guidelines can be considered as ALP for income tax purposes.
- SKOL Breweries Ltd vs. ACIT (ITA No. 6175/Mum/2011) dtd 18.01.2013 This decision was also concerned with payment of royalty within the limits provided under RBI guidelines. However, the Mumbai Tribunal, while rejecting the assessee™s arguments, held that
a. RBI guidelines cannot substitute ALP to be determined under ITA
b. Permissions under FDI policy are entirely in a different context / purpose and not from the point of ITA
c. When ITA lays down a detailed mechanism for determining ALP, then approval by other than Income tax authorities, does not ipso facto, partake the character of ALP.
- CIT v. Nestle India Ltd 337 ITR 103 337 ITR 103 (Del) Here again, the issue at hand pertained to royalty payment within the limits laid under RBI guidelines. Rejecting Tribunal™s view that since RBI™s permission is given, the Assessing Officer is not required to determine the reasonableness and genuineness of expenditure, the HC held that the purpose of RBI™s permission is totally different and concerned only with foreign exchange matters. Income tax provisions are not considered by RBI.
Conclusion
It is quite logical that RBI guidelines are distinct from Income tax and cannot be applied for determining ALP under transfer pricing regulations. These decisions can serve as guidance in case of a dispute regarding any other RBI guidelines laying down limits for remittance, eg. All-in-cost ceiling for foreign currency loan and trade credits. However, I may caution here that one cannot conclude that RBI guidelines are totally inapplicable to Income tax provisions. Time and again, the Income tax Department has held offenders with money laundering charges; money laundering being a regulation governed by RBI.
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By Urvi Kajaria Asher
