JULY 16, 2014

By Meghnand Dungarwal, CA

SECTION 92B of the Indian Income Tax Act defines the term “International transaction” as a transaction in the nature of purchase, sale, lease, provision of services between two or more associated enterprise either or both of whom are non-residents.

Sub-section (2) of Section 92B further extends the scope of Section 92B (and as a consequence, the scope of applicability of transfer pricing provisions) to transactions occurring between the taxpayer and an unrelated party in cases where there exists a prior arrangement between an associated enterprise of the taxpayer and such unrelated party or the terms of the transaction are determined in substance between the associated enterprise and such unrelated party.

Let us illustrate this with an example:

In this regard, the Hyderabad Tax Tribunal in the case of Swarnandhra IJMII Integrated Township Development Company Pvt. Ltd (ITA No 2072/Hyd/2011) held that a transaction between the tax residents in India cannot be constituted as an International transaction since Section 92B(1) requires transaction to occur between two or more associated enterprises either one or both of whom are non-residents and therefore, question of invoking deeming provisions under sub-section (2) does not arise in case of transactions between two resident entities. In connection with the applicability of Section 92B(2), references can also be drawn from the case of Kodak India Private Limited (ITA No 7349/Mum/2012), although facts of the case and basis of the decision are different than that of the aforesaid judgment.

However, the amendment in the Finance Bill 2014 proposes that the scope of international transaction will include the situations mentioned in the illustration above, irrespective of the fact that the transaction occurs between resident enterprises. The aforesaid amendment has the effect of reversing the Tax Tribunal decision.

The amendment will take effect from 1st April 2015 applying to assessment year 2015-16 onwards.

In light of the proposed amendment, taxpayers would need to cautiously relook at domestic transactions occurring as a result of global arrangements, such as global contract manufacturing or global services arrangement, wherein the terms of the transactions are negotiated and agreed at a global level and Indian counterparts of such arrangement execute the same in India, since now such transactions would be brought under the purview of transfer pricing regulations and consequently, all the requirements relating to transfer pricing (determination of arm's length price, maintenance of detailed documentation, etc.) will need to be complied with by the taxpayer.