Section 92B(2) of the Act – TP provisions
cannot impute notional income. Existence of a prior agreement with AE of the
Taxpayer is a pre-requisite for the transaction to qualify as a deemed
international transaction
Facts
The Taxpayer, an individual resident in India, was engaged in the
profession of acting in films and functioning as the brand ambassador for
various products.
During the year
under consideration, the Taxpayer was one of the parties to Share Purchase
Agreement (SPA) executed between FCo, a company incorporated in Bahamas, and
the shareholders of a Mauritius Company (MCo). FCo was owned by Mr A who was a
relative of the Taxpayer.
As per the SPA, the
shareholders of MCo agreed to transfer a portion of their shareholding in the
MCo to FCo. Taxpayer was neither a buyer
nor a seller of shares of MCo under the SPA but the Taxpayer undertook to provide
brand ambassadorship services to an Indian company (ICo), which was the wholly
owned subsidiary of MCo. The brand ambassadorship services were to be provided
in relation to the promotion of an Indian premiere league (IPL) team owned by
ICo. As per the SPA, such services were
to be provided by the Taxpayer without payment of any consideration by ICo.
However, ICo was not a party to SPA.
AO treated the
Taxpayer and MCo as Associated Enterprises (AEs) and held that the services
rendered by the Taxpayer to ICo by virtue of the SPA involving the shareholders
of MCo constituted an international transaction. The AO computed the ALP of the
brand ambassadorship services and imputed such ALP as additional income of the
Taxpayer.
Aggrieved, the
Taxpayer filed an appeal before the CIT(A) who held that Taxpayer’s
professional activities, constituted an ‘enterprise’ (distinct from Taxpayer
herself) u/s. 92F(iii). Further, since Mr. A controlled both FCo as well the
professional activities of Taxpayer (through the Taxpayer who was a relative),
there existed a AE relationship between the two enterprises u/s. 92A(2)(j).
CIT(A) also held
that the brand ambassadorship services were rendered by the Taxpayer to ICo on
the basis of a prior agreement (i.e the SPA) entered into by the AE of the
Taxpayer (i.e FCo). Hence, such services resulted in a deemed international
transaction u/s. 92B(2).
Aggrieved, Taxpayer
appealed before the Tribunal.
Held
On existence
of control u/s. 92A(2)(j)
– Section 92A(2)(j) deems
the two ‘enterprises’ as AEs if one of the enterprises is controlled by an
individual and the other ‘enterprise’ is also controlled by such individual or
his relatives.
– Although Mr A controlled
FCo, nothing was brought on record to show that Mr A or any of his relatives
controlled the Taxpayer. Hence there is no AE relationship between the Taxpayer
and FCo u/s. 92A(2)(j)2 .
On deemed
international transaction
– Section 92B(2) of the Act
cannot be applied to hold that transaction between Taxpayer and ICo was an
‘International transaction’ for the following reasons:
• None of the parties to the SPA qualified as
AE of the Taxpayer.
• As ICo was not a party to the SPA, there
was no ‘prior agreement’ between ICo and the AE of the Taxpayer.
On whether TP
can apply when there is no consideration
– Chapter X pre-supposes
existence of ‘income’ and lays down machinery provisions to compute ALP of such
income, if it arises from an ‘international transaction’.
– Section 92 is not an
independent charging section to bring in a new head of income or to charge tax
on income which is otherwise not chargeable under the Act.
– Accordingly, since no
income had accrued to or received by the Taxpayer u/s. 5, notional income
cannot be brought to tax by applying section 92 of the Act.
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2
The Tribunal did not rule on whether the CIT(A) was right in concluding
that the professional activity of the Taxpayer constituted a distinct
‘enterprise’.
