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ITAT explains international transaction

9th May, 2013

In a recent order, the Income Tax Appellate Tribunal (ITAT), Mumbai had the occasion to go into the question of what is or is not an international transaction. The parent company of the appellant had sold its imaging business, globally. As part of this, but on facts, independently, the Indian subsidiary sold its medical imaging business to the subsidiary of the foreign buyer. This was contended to be a purely domestic transaction and treated as such by the assessee.  The assessing officer (AO) and Transfer Pricing Officer  (TPO) sought to lift the corporate veil and determine the Arm’s Length Price  (ALP) of the transaction on the premise that there was an element of international transaction.      

Requisite conditions for international transaction

The assessee advanced the argument that though the sale transaction was pursuant to the global agreement between the two holding companies, yet the transaction in question was between two domestic companies, where, neither of the two companies was an AE and since the transaction in question was done within India, there was no element of international transaction. Further to invoke the deeming provision in Section 92B(2) of the Income-tax Act three conditions are necessary – there must be  two Associated Enterprises (AE), one of them must be a non-resident and there must be sale of some property. They also contended that the deeming provision must be construed strictly. In the instant case, neither party was an AE or non-resident. Another argument invoked in its support was that the agreement between holding companies had not influenced the transaction between the domestic companies, nor the domestic entities had contracted through the holding companies. The holding companies were two independent foreign companies.    

Powers under Chapter X and corporate personality

The Tribunal concluded that Chapter X gets its jurisdiction, if there is an international transaction, between AEs. In the instant case, the domestic transaction had not been influenced by the transaction between foreign parents and the same was evidenced by the sale agreements. Hence, even deeming provision of Section 92B(2), was not applicable to the impugned transaction.    

It held that there was no international element involved in the impugned transaction and that ‘to come within the purview of section 92(1), 92A(1) the transaction must go through the needle hole definition provided in section 92B(1)’      

Placing emphasis on distinct corporate personality of the domestic companies, the Tribunal also held that merely because the instant transaction had a positive economic behaviour by the foreign holding companies, the domestic transaction cannot be held to be a sham. It was of the opinion hat if thus interpreted, global transaction shall survive only without any tax implications under domestic laws.
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