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S.- 92B of the Act – (i) Managerial services provided prior to incorporation of proposed overseas subsidiary cannot be classified as an international transaction under section 92B despite the fact that the overseas subsidiary made reimbursement for the same post-incorporation. (ii) Fact that in the transfer pricing study submitted, transaction was classified as an international transaction is not determinative.
Facts:
The Taxpayer was engaged in the business of television broadcasting. To expand its business internationally, it proposed to establish a subsidiary in UK (UK Subsidiary). During the relevant assessment year, the Taxpayer performed certain management services in relation to its establishment of the UK subsidiary. Such services were undertaken prior to its incorporation in the capacity of a shareholder. Post incorporation of the UK subsidiary, the Taxpayer received reimbursement for the management services (including salary and other expenses incurred on its managerial personnel) from the UK subsidiary.
In the transfer pricing study submitted by the Taxpayer such reimbursed amount was classified as international transaction. AO made transfer pricing adjustments in respect of the reimbursed amount.
Taxpayer contended that the management services were provided prior to incorporation in order to conceptualise and give effect to an efficient group structure and hence such services cannot be considered as an international transaction.
Held:
•As per the OECD Transfer Pricing Guidelines, shareholder activity means an activity which is performed by a Member of an MNE group (usually the parent company or a regional holding company) solely because of its ownership interest in one or more group members i.e. in its capacity as a shareholder.
•Since the UK subsidiary had not come into existence at the time of rendering of services, the expenditure incurred on such services could be classified as expenditure for shareholder activity. Moreover, the Taxpayer had incurred the expenditure solely because of its ownership interest.
•The pre-incorporation provision of managerial services is a different transaction from the post-incorporation provision of managerial services since expenditure incurred when an AE was not in existence, cannot be classified as an international transaction.
•Merely because the UK subsidiary reimbursed expenditure post-incorporation, it cannot be the ground for triggering transfer pricing provisions.
•This holds good, notwithstanding that the Taxpayer itself had classified it as an international transaction in transfer pricing study.
