Section 92CE – Secondary adjustment-
Deciphering Finer aspects
·
Legal enforceability of Rate of Interest
prescribed u/s 92CE
Section 92CE
relating to Secondary adjustment provides for following:-
a) Deeming
excess money (Excess of Arm’s length Price as a result of Primary adjustment
over value of International transaction) as an advance recoverable from
Associated Enterprise.
b) Manner
of computation of Interest on such an advance.
c) Rate
of Interest.
In my view, the rate of interest prescribed
under rule 10CB in exercise of power u/s 92CE lacks legal enforceability
enunciated as under:-
1. Each
section and each chapter of Income Tax Act is meant for specific
operation/action as under;-
i)
Section 2- Defining the meaning of word used in
the Act, either extending or curtailing the dictionary or common parlance
meaning of the word.
ii)
Section 4 is charging section
iii)
Section 5 defines the range of Income
iv)
Section 14 qualifies the income to various head
v)
Section 15 to 59 (Chapter IV) quantify the
Income
vi)
Chapter X - Special provisions relating to
avoidance of tax - In other words, the said chapter deals with the Specific Anti Avoidance rules (SAAR) in
various scenarios, whereby it provides measures to re-adjust the taxable income
quantified under substantive provisions of Chapter IV
2. Submission
as regard non-enforceability of rate of interest prescribed u/s 92CE.
a) Is
every advancement of money by assessee is taxable transaction, mandating him to
compute and offer for tax interest thereon, even if no interest is charged by
him? This aspect is possible in either
of the two scenarios;-
i)
Where Interest on such advance is deemed as
Income u/s 2(24) or
ii)
Transaction of advancement of money is made part
of SAAR, whereby if prescribed conditions are satisfied, assessee will be
liable to offer for tax interest on such advance.
b) Section
92CE deems that excess money (Excess of Arm’s length Price as a result of
Primary adjustment over value of International transaction) is an advance
recoverable from Associated Enterprise (deemed debt).
c) Section
2(24) has not been amended to provide for interest on deemed debts as deemed
income.
d) Section
92B provides that transaction of advance between enterprise and associated
enterprise is an international transaction.
e) Section
92 provides that income arising on international transaction shall be
determined as per Arm’s length principle.
f) Thus
in view of afore-said, the interest
on deemed debt u/s 92CE is made taxable (i.e charged) by virtue of application
of Section 92 i.e SAAR and in this scenario, Interest rate prescribed
u/s 92CE has no applicability, explained as under:-
i)
Assessee will be required to find comparable
uncontrolled transaction (CUT) for deemed debt
ii)
The Income accruing under CUT will be deemed as
income from deemed debt.
iii)
There is no requirement to visit section 92CE to
compute interest on deemed debt on the rates prescribed in the section, when
the same is computed under ALP mechanism.
g) At
this point, following points also merits attention
I.
The role of Chapter X is to prescribe
benchmark/milestone/criterion to evaluate whether there is avoidance of tax in
different scenarios and then provide the mechanism to recover avoided tax
either through enhancement of income or disallowance of loss quantified under
chapter IV and other substantive provisions.
II.
The quantification/computation of income is a solely
domain of chapter IV.
III.
Even if definition of income is being amended to
deem interest on deemed debt as income, its quantification can be only be
provided in Chapter IV and not in Chapter-X
IV.
Safe harbor rules u/s 92CB also does not provide
for quantification of Income. It only provides that if an income on
international transaction is within the range provided under safe harbor rule,
it will be deemed that same is as per ALP, even if income under comparable transaction
is more than income under international transaction. In other words, safe
harbor rule does not provide for quantification of income but only modifies the
ALP mechanism by making section 92 subject to section 92CB.
V.
To illustrate, section 92B provides that
Corporate Guarantee or receivable is International transaction and
income/interest thereon shall be computed on ALP basis. Safe harbor rules only
provide that in certain situations, if income/interest thereon, quantified
under Chapter IV, is at level specified in the safe harbor rules, it shall be
deemed that income/interest is at ALP. Thus law has not quantified
income/interest on corporate guarantee or receivable under chapter X
VI.
For Secondary adjustment, section 92 has not
been made subject to section 92CE, similar to safe harbor rules. Thus section
92 will operate independently of section 92CE. Further, when a section provides
for chargeability of Income to Tax, then computation machinery relating to that
charging section will prevail, over the other computation provision relating to
that income.
Thus interest rate prescribes u/s 92CE has
no applicability for following reasons:-
a) The
interest on deemed debt is made chargeable by virtue of application of
provision of section 92 and accordingly
interest is to be computed as per the ALP mechanism prescribed for section 92,
rather than on the basis of rate prescribed u/s 92CE
b) Section
92 has not been made subject to the provision of section 92CE, similar to
section 92CB relating to Safe harbor rules, thus providing for independent
operation of section 92.
c) Further
role of Chapter X is not to provide for quantification of Income, which is sole
prerogative of Chapter IV.
·
Recovery of deemed debt
1. Section
92CE provides that till deemed debt is recovered, assessee has to charge
interest on deemed debt.
2. The
point for consideration is whether deemed debt should be recovered separately in
specie or if the value of International transaction in subsequent years is more
than ALP, can it be taken that assessee has recovered deemed debt
3. If
deemed debt is recovered separately, then issues involved will be as under:-
a) The
deemed debt is not an actual debt in the books of assessee.
b) If
the assessee recover such deemed debt, then recovery of same will be either credited
in the P&L or be taken as direct credit to reserve.
c) In
the year of recovery, if assessee is
subject to MAT, then whether assessee will be liable to MAT, if such amount is
credited to P&L
d) There
is no such exception provided u/s 115JA for exclusion of the same
e) However
MAT is entire code in itself and whether exclusion of such recovery from
computation of book profit will be permitted is debatable question
f) If
MAT is not applicable and recovery is credited to P&L, then under normal
provision, assessee can exclude the same from Computation of Income, on the
principle of double taxation of same income.
4. If
in subsequent years, value of International transaction is more than ALP, then
can it be deemed that assessee has recovered deemed debt advanced to associated
enterprise. Exemplified
a) In
year 1, AO made primary adjustment to the extent of Rs. 5 Cr, which assessee
disputed and but lost the case before ITAT in Year 5
b) In
Year 2 & 3, the assessee facts are as under;-
|
Year
|
Income under International
Transaction
|
Income under Comparable
Uncontrolled Transaction
|
|
2
|
12 Cr
|
10 Cr
|
|
3
|
14 Cr
|
11 Cr
|
c) In
above case, though assesse international transaction is at ALP, can assessee take
stand that since income under international transaction is in excess of income
under CUT by Rs. 5 Cr in aggregate, he has recovered the deemed debt relating
to Year 1 and as such there is no requirement for secondary adjustment in Year
5, when assessment proceedings for year 1 crystallized.
