Technical Update from India

Rohan Phatarphekar and A Pradeep from TP Week correspondent firm KPMG in India report on two recent cases

The taxpayer is now entitled to a tax holiday on voluntarily increased income due to transfer pricing adjustment

Under Indian TP regulations, the tax assessing officer (AO) has powers to determine the arm’s length price (ALP) relating to international transaction between associated enterprises. However, the tax holiday is not available on the enhanced income determined by the AO after considering the ALP.

In a recent case involving iGate Global Solutions (pictured), the taxpayer after computing the ALP in relation to its international transactions, made an upward adjustment to its income and claimed tax holiday on its total income.

The Bangalore tribunal held that such upward adjustment by the tax payer is not an enhancement due to determination of ALP by the AO; hence a tax holiday shall be available on such voluntarily increased income.

A foreign company providing computer reservation system (CRS) services is not to be taxed in India even though a permanent establishment (PE) exists, if the PE is remunerated at arm’s length.

In the case of Galileo International, the Delhi tribunal held that the taxpayer had a business connection in India under the Income-tax Act, 1961 and fixed/agency place PE under the India-US tax treaty. Accordingly, 15% of the revenue accruing from bookings made in India was attributed to the PE.

However, the tribunal relying on Supreme Court’s decision in Morgan Stanley’s case held that the entire income accruing in India was completely offset and exhausted, inter-alia, by arm’s length payments to Indian distributor. Therefore no income could be further charged to tax in India.

rohankp@kpmg.com

pradeepa@kpmg.com