2018 (12) TMI 61 - HC - Income Tax

Transfer pricing - International transaction or not - money routed through the AE by the assessee for the purpose of acquisition of distributorship - Held that - Explanation to Section 92B clarifies certain doubts. As per clause (c) of this explanation, capital financing including any type of long-term or short-term borrowings, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising in the course of business would be included within the expression international transaction . Revenue had heavily relied on this explanation. Having regard to the nature of entire arrangement and the different transactions, noted above, in our opinion, the said explanation would not cover the present situation. As noted, the present case is a simple one where the money was routed through the AE by the assessee for the purpose of acquisition of distributorship. This is not a case of either financing or landing or advancing of any moneys. The back to back agreements, the contents thereof and most significantly, the fact that neither at the point of payment nor at the point of refund of money, the AE retained the same for any significant period of time, in our opinion, would be crucial. This transaction did not result into diversion of income of the assessee to its AE. The Tribunal, therefore, committed no error - once we come to the conclusion that the transaction did not give rise to the international transaction, the rest of the issues would become academic. Income Tax Appeal dismissed

Summary

Issues:
1. Interpretation of international transaction under Section 92B of the Income Tax Act.
2. Applicability of transfer pricing mechanism in the case of interest-free advances made by the assessee to its associated enterprise.
3. Examination of the transaction in relation to Chapter X of the Income Tax Act.

Analysis:
1. The primary issue in this case was the interpretation of international transaction under Section 92B of the Income Tax Act. The Revenue challenged the Tribunal's judgment, arguing that there was an international transaction between the assessee company and its associated enterprise (AE) due to back-to-back agreements for procurement of film rights. The Tribunal, however, found that the transaction did not give rise to an international transaction as the advances were made for acquiring distributorship rights and not for financing or lending purposes. The Tribunal's conclusion was based on the fact that the AE did not retain any amount, and the money was immediately transferred to the third party, Citi Gate.

2. Another significant issue was the applicability of the transfer pricing mechanism concerning interest-free advances made by the assessee to its AE. The Revenue contended that such advances transferred profit, invoking the transfer pricing regime. However, the Tribunal disagreed, emphasizing that the transaction was genuine and aimed at acquiring distributorship rights. The Tribunal's analysis considered the entire transaction as a whole, concluding that there was no diversion of income to the AE. The Tribunal's decision was supported by the fact that the AE did not retain the advanced amounts for its own use, ensuring no transfer of income.

3. The examination of the transaction in relation to Chapter X of the Income Tax Act was crucial in determining the tax implications. The Tribunal's detailed scrutiny of the agreements and bank statements revealed that the transaction was solely for acquiring distributorship rights and did not involve any financing or lending activities. The Tribunal's reliance on the Vodafone case and the specific provisions of Section 92B reinforced its conclusion that the transfer pricing provisions were not applicable in this case. Consequently, the Tribunal dismissed the Income Tax Appeal, affirming that no international transaction occurred, and no question of law arose in this regard.

In conclusion, the judgment by the High Court of Bombay upheld the Tribunal's decision, emphasizing the genuine nature of the transaction, the absence of income diversion, and the specific purpose of the advances made by the assessee to its AE. The detailed analysis of the agreements, bank statements, and legal provisions supported the Tribunal's findings, ultimately leading to the dismissal of the Income Tax Appeal.