S/s. 92A, 92B – ‘Deemed international transaction’ fiction is not applicable to transactions between Indian entities. Indian JV’s transaction with ‘Indian JV partner’ is not hit by transfer pricing provisions.

S Pvt Ltd (taxpayer) is a joint venture company (JV Co), with Andhra Pradesh Housing Board (APHB) and an Indian company (ICo) as JV partners. ICo is a subsidiary of a foreign group (FCo Group). APHB and ICo are the shareholders of the taxpayer in the ratio of 49:51. The taxpayer JV Co was responsible for the construction and implementation of the housing projects as contemplated by APHB and was bound by the policy framework of the Government of Andhra Pradesh (GAP).

During the year, the JV Co entered into transactions with ICo. The Transfer Pricing Officer (TPO) treated these transactions as ‘deemed international transactions’ u/s. 92B(2) and held that though the transactions were entered into by the taxpayer with IJMII, the terms of such transactions were determined in substance between the taxpayer and FCo Group (Associated Enterprise). On appeal, Dispute Resolution Panel (DRP) upheld TPO’s view. Aggrieved, the taxpayer appealed before the Tribunal.

Held:

In order to determine deemed associated enterprise relationship u/s. 92B(2), the international transaction should be between enterprises wherein at least one of enterprise is a non-resident. In the facts of the case, both the parties are residents and hence the same should not constitute international transaction.

Further on scope of s/s. 92A and 92B(2) the tribunal held as below:

One of the essential limbs/constituents of an international transaction is “associated enterprise”. Section 92B(2) outlines the circumstances under which a transaction between two persons would be deemed to be between associated enterprises. Such deeming fiction is in addition to the one created u/s. 92A(2) i.e., parameters of management, control or capital. Section 92B(2) should be read as an extension of definition of AE u/s. 92A.

U/s. 92A two or more enterprises once determined to be AEs remain so for the entire financial year. However, the fiction embodied in section 92B(2) is transaction specific and does not apply to all transactions between the enterprise.

The legal fiction created u/s. 92B(2) in respect of the specified transaction can be used only for the purpose of examining whether such transaction constitutes an ‘international transaction’ u/s. 92B(1). In case section 92B(1) is not attracted, the fiction u/s. 92B(2) ceases to operate.