Sections 92A, 92B of the Act – Transaction with foreign branch of Indian company is not an ‘international transaction’. Threshold of 90% purchase for determining associated enterprise (AE) relationship u/s. 92A(2)(h) is to be computed qua each supplier for AE determination.

1.       TS-689-ITAT-2017(Mum)

Elder Exim Pvt. Ltd. vs. DCIT

A.Ys: 2008-09 to 2010-11,

Date of Order: 16^th August, 2017

Facts

Taxpayer is an Indian company engaged in the business of
manufacturing of spliced decorative veneer in flitch form. During the
assessment year (AY) under consideration, Taxpayer had entered into transaction
of purchase/import of raw-materials with two entities. One of the entities was
a foreign Company FCo and the other was the US branch of another Indian
company, ICo.

AO treated the transactions with the two entities as
‘international transactions’ within the meaning of section 92B of the Act. It
was contended by the AO that both FCo and ICo are Associated Enterprises (AEs)
for the following reasons: (1) 90% of purchases of Taxpayer were from FCo and
the US branch of ICo (2) Taxpayer and FCo had common shareholders/director who
influenced the prices at which the goods were purchased by the Taxpayer.

Taxpayer contended that (a) since there were no common
shareholders/directors of FCo and taxpayer, FCo was not an AE of the Taxpayer.
Thus the transaction with such entity would not qualify as an international
transaction; (b) Moreover, the transaction with US branch of ICo was a
transaction with an Indian entity and hence, did not qualify to be an
international transaction.

AO rejected the claims of the Taxpayer and made adjustment to
the purchase price paid by the Taxpayer by re-determining the arm’s length
price.

Aggrieved by the action of AO, Taxpayer appealed before
CIT(A) who affirmed the order of AO. Subsequently, Taxpayer appealed before the
Tribunal

Held

–   International transaction is defined under
the Act as a transaction between two AEs, where either or both of them are
non-residents (NRs).

–   The fact
that ICo is an Indian resident is not disputed. Since Taxpayer and ICo are
residents, the transaction between Taxpayer and ICo’s US branch cannot be
characterised as ‘international transaction’ under the Act.

–   There was no evidence brought on record to
show that Taxpayer and FCo had common shareholders/directors. Further, the
director/shareholders of Taxpayer negotiated the prices of the purchases on
behalf of Taxpayer and not on behalf of FCo.

–   Two enterprises are treated as AEs, u/s.
92A(2)(h), if 90% or more of purchases of one enterprise is from the other
enterprise. Thus, the Act requires computation of 90% threshold qua each
enterprise or party. It does not permit aggregation of purchases from different
parties for the purpose of testing the 90% threshold.