By Geeta Jani, Dhishat B. Mehta; Chartered Accountants
fiogf49gjkf0d
Sections 92A(1), 92A(2)(g) of the Act – Section 92A(2) cannot be read independent of Section 92A(1) for determining whether enterprises are associated.
Facts
The Taxpayer, an Indian company was engaged in the business of manufacture and sale of ready-made garments. The Taxpayer was a licensee of the brandname owned by an USA Company (FCo).
The brand name was used by the Taxpayer for the purpose of exclusive manufacturing and marketing of the garments under the brand name of FCo. For grant of license, the Taxpayer was required to pay royalty at the rate of 5% of its sales to FCo. The Taxpayer owned the entire manufacturing facility, capital investment, employees and there was no participation of FCo in the capital and management of the Taxpayer. Taxpayer argued that the transfer pricing (TP) provisions do not apply as there is no ‘Associated Enterprise’ (AE) relationship between the Taxpayer and FCo. Nevertheless, Taxpayer disclosed the transaction in Form 3CEB.
Assessing officer (AO) referred the matter to Transfer pricing officer (TPO) for determination of arm’s length price (ALP) of the transaction. As per the TPO, the transaction was not at ALP and consequently he proposed an adjustment to the income of the Taxpayer. The Taxpayer filed objection before Dispute resolution panel (DRP), which rejected the objections of the Taxpayer.
Aggrieved, Taxpayer appealed before the Tribunal.
Held
Section 92A(1) defines AE based on the parameters of management, control or capital. Section 92A(2) is a deeming provision and enumerates circumstances in which the enterprise can be deemed to be an AE.
Thus the conditions of both Sections 92A(1) and 92A(2) are to be satisfied in order to constitute an AE relationship.
The contra view that, satisfaction of the conditions of section 92A(2) alone is sufficient for creation of an AE relationship would render section 92A(1) otiose. While interpreting a provision in a taxing statute, the construction should preserve the purpose of the provision. If more than one interpretation is possible, that which preserves its workability and efficacy is to be preferred to the one which would render a part of it otiose or sterile.
Thus even though the conditions of section 92A(2)(g) are satisfied, in absence of any right with FCo to control and manage Taxpayer, Taxpayer and FCo cannot be considered as AEs, and consequently TP provisions will not apply to transactions undertaken between them.
