By Geeta Jani, Dhishat B. Mehta Chartered Accountants
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Sections 92A, 92B(1) – Transactions between a branch and head office cannot be considered as “international transaction” under the Act.
Facts:
Taxpayer, an Indian Head office, rendered software development and consultancy services to its branch situated in Canada. The taxpayer contended that the transactions with branch office were not in the nature of transactions with associated enterprises (AEs) as branch cannot be treated as a separate entity and hence should not be treated as international transaction under the Act.
However the Tax authority treated this transaction as international transaction and proceeded to calculate the arm’s length price. Aggrieved the taxpayer appealed before the Tribunal.
Held:
Section 92B(1) of the Act provides that an International transaction means a transaction between two or more AEs. Thus for treating any transaction as an international transaction, it is sine qua non that there should be two or more separate AEs.
From a bare reading of section 92B(1) and section 92A of the Act which provides the meaning of AEs it clearly transpires that in order to describe a transaction as an ‘international transaction’, there must be two or more separate entities.
The Taxpayer has consolidated the financial results of the head office as well as the Canada branch and offered the aggregated income to tax. The fact that the office in Canada is Taxpayers branch office and not a distinct entity was specifically argued before the Tax Authority which was not negated by the Tax Authority. Thus it is clear that the branch office is not a separate entity.
As per the principle of mutuality, no person can transact with himself in common parlance. As such, one cannot earn any profit or suffer loss from oneself. Even if Tax authority’s contention that the Taxpayer has earned an income from his branch is accepted then such profit earned would constitute additional cost to the Branch. On the aggregation of the annual accounts of the HO and branch, such income of the head office would be set off with the equal amount of expense of the Branch, leaving thereby no separately identifiable income.
Inter se dealings between HO and branch cease to be commercial transactions in the primary sense. In such a case it cannot be contended that such transaction should be treated as an international transaction.
