Unrelated party wholly dependent on use of trademarks of taxpayer is an AE u/s.92A(2)(g) by virtue of effective control on decision making and hence, its transactions with other AEs of the taxpayer are deemed to be transactions between AEs.
Facts
The taxpayer was an Indian company engaged in the business of marketing alcoholic beverages in India. It procured the beverages either by getting them manufactured from Contract Bottling Units (‘CBUs’) or by importing them from its associated enterprises (‘AEs’). The CBUs were unrelated parties. The CBUs imported concentrates and other inputs from the AEs of the taxpayer. As per the agreement between the taxpayer and a CBU, the CBU was required to meet all costs, realise sale proceeds and if the sale proceeds exceeded the costs and the agreed margin of profit, the CBU was to credit the surplus to taxpayer.
The following is the diagrammatic presentation of the abovementioned arrangement.
The taxpayer reported all the transactions with AEs including purchase of concentrates and inputs by CBUs from AEs.
The AO made reference to the TPO for determination of ALP in respect of all transactions reported by the taxpayer. The TPO noted that the CBU was dependent on the trademarks owned by Diageo Group and accordingly, u/s.92A(1)(a) as also the deeming fiction in section 92A(2)(g) of Income-tax Act, the CBU was effectively controlled by Diageo Group. Hence, the CBU, the taxpayer and other Diageo Group entities are AEs. Therefore, TPO made adjustment in respect raw material purchases by CBU from the AEs of the taxpayer.
The taxpayer contended that: the CBU was an unrelated party; merely because a transaction with an independent enterprise is reported in Form No. 3CEB out of abundant caution, such transaction does not become a transaction with an AE; the CBU had entered into arrangement with the taxpayer and hence, the relationship of AE could at best be between the taxpayer and the CBU and cannot extend beyond that; also, there was nothing on record to suggest that the AEs from whom the CBU had imported raw materials participated in control or management or capital of the CBU.
Held
The Tribunal observed and held as follows. The true test of AEs is control by one enterprise over the other, or control of two or more AEs by common persons. Essentially, such control is effective control in decision making. The CBU is wholly dependent on the use of trademarks in which the taxpayer has exclusive rights. Hence, this relationship meets the test of de facto control of decision making as set out in section 92A(2)(g). The taxpayer, in turn, is controlled by way of capital participation by Diageo PLC, which also controls other entities in Diageo Group including those from whom the CBU imported raw materials. Therefore, the CBU, the taxpayer and Diageo Group entities supplying the raw material are all AEs. Since, the costs of all raw materials are effectively borne by the taxpayer, the transaction is actually between the taxpayer and the Diageo Group entities. Since the taxpayer as well as the CBU is under the control of Diageo PLC, the transactions are between AEs.
