Sections 92B, 92F of the act – Transaction between indian HO
and foreign BO – is not subject to transfer pricing provisions
Facts
An
Indian company (‘Taxpayer’ or ‘HO’) had a branch office (BO) in Canada. The taxpayer had entered into
certain transactions with its BO. The
TPO/AO considered such transactions as ‘international transaction’ and determined
the arm’s length price (ALP) of the transactions.
The
issue before ITAT was whether the TPO/AO
was justified in treating the transactions between the HO and BO as an
international transaction.
Held
–
According to principle of mutuality, no person can earn income nor suffer
losses from dealings with self. There cannot be a valid transaction of sale
between BO and HO. Hence, profit on such sales is not includible while
computing total income of ho. reliance in this regard was placed
on Calcutta tribunal’s
decision in the case of Betts Hartley Huett & Co.
Ltd. vs. CIT (1979) (116 ITR 425).
–
A transaction can be treated as an international transaction, only if it is a
transaction between two or more associated enterprises (AEs). Since BO
is not a separate enterprise, one cannot treat a transaction between HO and
BO as an international transaction.
–
“Enterprise” has been defined u/s. 92F(iii), to include a permanent
establishment. Thus, a
BO can be treated as an enterprise. Nevertheless,
the definition of ‘international transaction’ when considered in juxtaposition
to the definition of ‘enterprise’, give prima facie impression that all the
transactions between a BO and its HO are
to be subjected to the transfer pricing provisions.
–
However, this prima facie impression loses its substance, when the HO
in question is an indian entity. This is for the reason that the indian entity
is taxable in india on its worldwide income, including the income earned
outside india through its branch.
–
When the accounts of the indian HO and BO
are aggregated, income of the HO would be set off with an equal amount
of expense of the BO, leaving thereby no
separately identifiable income on account of transactions between HO and BO.
– Thus,
over or under invoicing between the HO and BO will always be tax neutral
in the case of an indian entity having a PE outside india. ALP adjustment for
such transactions will result in charging tax on income which is more than the
amount legitimately due to the exchequer and hence, impermissible.
– The aforesaid rationale is restricted only to
transactions between the indian HO and its foreign Bo. In case where HO is a foreign entity, it is
taxable in india only on its indian income and hence, there may be an allurement
to such foreign entities to resort to over invoicing, to mitigate tax burden in
india. Hence, the above discussion does not apply to a case where the
transaction is between a foreign entity and its BO in india.
– In
the present case as the HO is an indian
entity which offered the income earned from india as well as that earned
by its BO to tax in india, transactions
between such indian HO and BO are not subject to TP provisions
P.S.:
i. The ruling does not provide any clarity
about the nature of the transaction between indian HO and BO and the basis on
which ALP adjustment was suggested by the AO
ii. PE of indian Company is considered as
resident in india. Hence, transactions
between HO and BO are unlikely to be
regarded as within the ambit of Indian Transfer Pricing Provisions.
