MAY 24, 2015

By Priyanka Gera

International Transaction

A. As per Section 92B of the Income Tax Act, 1961 (hereafter referred as 'IT Act, 1961'), a transaction between two or more associated enterprises, either or both of whom is non-residents, in the nature of:

_ purchase, sale or lease of tangible or intangible property, or

_ provision of services or

_ lending or borrowing money, or

_ any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and

_ shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.

B. A transaction entered into by an enterprise with a person other than an associated enterprise shall be deemed to be a transaction entered into between two associated enterprises,

_ if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or

_ the terms of the relevant transaction are determined in substance between such other person and the associated enterprise. This may be understood well by the following example,

The Enterprise X and Y are Associated Enterprises whereas Enterprise X and Z are not an AE Enterprise. Y and Enterprise Z enter into an agreement for determining the terms of transactions between enterprise X and enterprise Z. The transaction as may be entered between X and Z which is governed by such an agreement existing between Y and Z shall be deemed to be a transaction between two associated enterprises and thus will be called as deemed associated transaction.

Under the IT Act, 1961, Total Income of a resident is taxable in India. However, in case of a Non-resident, only an income which is received or deemed to have been received by or on his behalf and income which accrues or arises or is deemed to accrue and arise in India, is taxable in India.

In order to ascertain the income chargeable to tax, a residential status would need to be determined as under.

Determination of residential status - Individual

The individuals are classified into three categories based on their residential status:

#the period of 60 days shall be substituted by 182 days in case an Indian Citizen leaves India for employment or is a member of crew of an India Ship or is a Person of Indian origin who visits India during the PY

Determination of residential status  - Company

Now, the concept of International Taxation includes domestic legislation covering foreign income of resident (globally) and domestic income of non-resident.

In order to consider any transactions among residents and non-residents, an element of "Associated or Deemed Associated Enterprise" should be present.

An Associated enterprise (hereinafter referred as 'AE') has been defined under Section 92A of the IT Act, 1961, that means an enterprise:

- Which participates, directly or indirectly or through one or more intermediaries, in the management or control or capital of the other enterprise; or

- In respect of which, same persons of one enterprise are participates in the management or control or capital of the other enterprise.

Further, two enterprises will be deemed as Associated Enterprises if

Specified domestic transaction

The applicability of Transfer Pricing provisions have been extended to specified domestic transactions (hereinafter referred as 'SDT') w.e.f April 1, 2012. It would essentially include payment made by a company to a related person. The same has been defined under Section 92BA of the IT Act, 1961 as follows:

In case of an assessee means any of the following transactions, not being an international transaction, namely:-

- any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) of section 40A;

- any transaction referred to in section 80A;

- any transfer of goods or services referred to in sub-section (8) of section 80-IA;

- any business transacted between the assessee and other person as referred to in sub-section (10) of section 80-IA;

- any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable; or

- any other transaction as may be prescribed, Thus, SDT is a transaction which is covered under aforementioned criteria and the aggregate of such transactions exceeds a sum of five crore rupees in a year.

Cross Border Transaction

A transaction is considered as cross-border transaction if it originates in one country and gets concluded in another country.

Hence, all international transactions cannot be considered as cross-border transactions and not all cross-border transactions are considered as international transactions.

Conclusion

There are various international transactions taking place among different countries for different purposes. Hence, it is important to have a clear understanding of the basic terms used in the concept of International transactions.