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2020 (3) TMI 413 - AT - Income TaxTP Adjustment - Kaybee Exim Pte Ltd Singapore (KPEPTL) is an associated enterprise (AE) of the appellant within the meanings of Section 92A - HELD THAT - Ld representatives fairly agree that the case of the Assessing Officer hinges only on application of Section 92A(1) and it does not meet any of the specific conditions set out in Section 92A(2). Once we hold that Section 92A(1) cannot be applied on standalone basis, and has to be essentially considered in conjunction of Section 92A(2) only when it satisfies at least one of the conditions set out therein, it is clear that the relationship between the assessee company and its KE-S cannot be said to be that of the associated enterprises. The case of the revenue must, therefore, fail on this test. In view of the above discussions, as also bearing in mind entirety of the case, we have to hold that the relationship between the assessee and the KE-S was not of the AEs, and, accordingly, no arm s length price adjustments could be made on the transactions between these two entities.
Issues Involved:
1. Validity of the reassessment proceedings. 2. Determination of whether the assessee is an "associated enterprise" (AE) of Kaybee Exim Pte Ltd (KE-S) under Section 92A of the Income Tax Act, 1961. 3. Applicability of judicial precedents and CBDT circulars in the interpretation of Section 92A. Issue-Wise Detailed Analysis: 1. Validity of the Reassessment Proceedings: The fundamental issue in the appeal revolved around whether the assessee can be considered an "associated enterprise" of Kaybee Exim Pte Ltd (KE-S) under Section 92A. The validity of the reassessment proceedings was not addressed in detail as the decision on the AE relationship rendered other issues academic. 2. Determination of Associated Enterprise (AE) Relationship: The primary contention was whether the assessee and KE-S were associated enterprises under Section 92A. The Assessing Officer held that they were AEs based on Section 92A(1)(b), which defines an AE as an enterprise where one or more persons participate in its management, control, or capital. The assessee argued that the relationship did not satisfy the conditions in Section 92A(2), which should restrict the scope of Section 92A(1). The Tribunal noted that previous decisions in the assessee's own case had held against the assessee. However, the Tribunal considered subsequent judicial precedents and legislative intent, emphasizing that Section 92A(2) restricts the scope of Section 92A(1). The Tribunal referred to the CBDT circular and the Memorandum to the Finance Bill 2002, which clarified that the criteria in Section 92A(2) must be fulfilled for two enterprises to be deemed AEs. The Tribunal concluded that the relationship between the assessee and KE-S did not meet any of the specific conditions in Section 92A(2) and thus, they could not be considered AEs. 3. Applicability of Judicial Precedents and CBDT Circulars: The Tribunal highlighted the importance of following judicial precedents and CBDT circulars. It referred to the decisions in cases like Page Industries Ltd, Orchid Pharma Ltd, and Veer Gems, which supported the view that Section 92A(2) restricts the scope of Section 92A(1). The Tribunal noted that the decision in Veer Gems was approved by the Gujarat High Court and the Supreme Court, making it binding. The Tribunal emphasized that CBDT circulars, which mitigate the rigour of the law, are binding on the field authorities. The Tribunal acknowledged that the earlier decision in Diageo India Ltd, which did not consider the CBDT circular and the legislative intent, was per incurium. The Tribunal held that the views expressed by the coordinate benches, approved by higher judicial forums, must be followed, and the relationship between the assessee and KE-S did not qualify as an AE relationship under the correct legal interpretation. Conclusion: The Tribunal allowed the appeal, holding that the relationship between the assessee and KE-S was not that of associated enterprises. Consequently, no arm's length price adjustments could be made on the transactions between these entities. The Tribunal decided the appeal on this short issue, rendering other legal and factual issues academic. The appeal was allowed, and the impugned ALP adjustment was deleted.
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