By Geeta Jani, Dhishat B Mehta, Chartered Accountants
Section 92A of the Act – Reference to “management, control
and capital’ in section 92A(1) is to be understood based on the illustrations
provided u/s. 92A(2) alone – A partnership firm is not controlled by an
individual and hence Clause (j) of section 92A(2) dealing with control by
common individuals and those relatives, does not apply to the facts of the
present case
Facts
Taxpayer, an Indian partnership firm and tax resident of
India, was engaged in the business of manufacture and sale, of polished diamonds
both in India and outside India. The partners of the Taxpayer firm were three
brothers (along with their wives and sons).
During the year under consideration, the Taxpayer firm had
entered into certain international transactions with a Belgian entity (FCo).
FCo was owned and controlled by fourth brother (along with his wife and son) of
the partners of Taxpayer firm.
Assessing Officer (AO) contended that since FCo is controlled
by another brother of the partners, it is to be treated as Associated Enterprises
(AE) in terms of section 92A(2) of the Act and, accordingly, made a reference
to the Transfer Pricing Officer (TPO) to determine the arm’s length price (ALP)
of the transactions entered by Taxpayer with FCo . Thereby, the TPO made an ALP
adjustment u/s. 92CA(3) of the Act.
Aggrieved by the order of the TPO, the Taxpayer appealed to
Commissioner of Income-tax (Appeals) i.e. CIT(A).CIT(A) without discussing the
primary issue of the existence of an AE relationship in terms of section 92A of
the Act, proceeded to examine the correctness of the ALP and deleted the
impugned adjustment.
Aggrieved by the order of CIT(A), revenue appealed before the
Tribunal. Additionally, Taxpayer also appealed before the Tribunal.
Held
Section 92A(1) of the Act provides that an enterprise, in
relation to the other enterprise, would be regarded as AE if, the enterprise
participates, directly or indirectly, in the management or control or capital
of the other enterprise or if the persons who participate in management, control
or capital of both the enterprises are common.
Section
92A(2) of the Act only provides illustrations of the cases in
which an enterprise participates in management, capital or
control of another enterprise.
– The terms ‘participation’, ‘management’, and
‘control’ are not defined under the Act. One has to thus take recourse to
sub-section (2) to section 92A of the Act which gives practical illustrations,
to understand the meaning of ‘participation in management or capital or
control’. These illustrations are exhaustive and not illustrative.
– Section 92A(2) governs the operation of
section 92A(1) by controlling the definition of participation in management or
capital or control by one of the enterprises in the other enterprise. If a form
of participation in management, capital or control is not recognised by section
92A(2), it does not result in enterprises being treated as AEs.
– Even if one enterprise ends up having a de
facto or even de jure participation in the management, capital, or control of
the other enterprises, the two enterprises cannot be said to be AEs, unless
such participation in management, capital or control is covered by section
92A(2). Tribunal relied on Orchid Pharma Ltd vs. DCIT [(2016) 76 taxmann.com
63 (Chennai)] and Page Industries Ltd vs. DCIT [(2016) 159 ITD 680
(Bang)]
– Clause (j) of section 92A(2) which is
relevant in the present fact pattern provides that two enterprises are to be
treated as AE if one enterprise is controlled by an individual and the other
enterprise is also controlled by such individual or his relative or jointly by
such individual and relative of such individual. In the present case, since the
Taxpayer is a partnership concern, it cannot be said to be controlled by an ‘individual’
and consequentially clause (j) cannot be invoked in the present case.
– Even though a certain degree of control may
actually be exercised by these enterprises over each other due to relationships
of the persons owning the enterprises, that itself is not sufficient to hold
the two enterprises as AEs.
– Taxpayer and FCo are thus not to be treated
as AEs.
