2014 (6) TMI 708 - AT - Income Tax

Transfer pricing adjustments - associated enterprise - Nature of assessee company Subsidiary of M/s IJM Corporation, Berhad or not Transaction to be fall u/s 92B(2) of the Act or not Held that - Following M/s. Swarnandhra IJMII Integrated Township Development Company Pvt. Ltd. Versus The Deputy CIT Circle-3(3) Hyderabad 2014 (6) TMI 595 - ITAT HYDERABAD - the transaction taken place is with domestic enterprises and at least one among the AEs are not non-resident - Both the assessee and IJMII are the residents for the purpose of Indian Taxation as they are Indian companies - Any transaction between them will not constitute an international transaction - The primary condition for attracting transfer pricing provisions is that there should be a transaction between two or more associated enterprises - Section 92A defines the term associated enterprise - Section 92A(1) provides the broad parameters on satisfaction of which two or more enterprises constitute associated enterprises - These parameters are participation in the management or control or capital of the other enterprise - Sub-section (2) of section 92A enlists specific situations which make two or more enterprises associates of each other for the purposes of sub-section (1). A transaction between associated enterprises satisfying the prescribed criteria becomes an international transaction - one of the essential limbs/constituents of an international transaction is associated enterprise - Section 92B(2) outlines the circumstances under which a transaction between two persons would be deemed to be between associated enterprises - Such deeming fiction is in addition to the one created u/s 92A(2) - The deeming fiction u/s 92A(2) are limited to the parameters of management, control or capital - Section 92B(2) travels beyond these parameters - Transaction between an enterprise and a person which is not an associated enterprise u/s 92A, may be deemed to be transaction between associated enterprises for the purposes of section 92B(l) if the conditions contained in section 92B(2) are attracted. Section 92B(2) embodies a legal fiction - It deems a transaction to have been entered into between two associated enterprises - section 92B(2) is a part of section 92B with the heading Definition of international transaction , it is to be read as an extension of section 92A(2) and not as an extension of section 92B(1) - There is a difference between associated enterprises defined u/s 92A and transaction deemed to be between associated enterprises u/s 92B(2) u/s 92A, two or more enterprises once determined to be associated enterprises remain so for the entire financial year - Their relationship will not change for different transactions between them - They will remain associated enterprises even if they do not have any transaction during the previous year - a transaction between an enterprise and another person can be deemed to be transaction between associated u/s 92B(2) only in respect of transactions specified and not otherwise - This fiction is transaction specific and does not apply to all transactions between the enterprise and person, on the basis that one transaction attracts section 92B(2). The intermediary would facilitate the transfer of services or goods from one enterprise to its associate enterprise with no value addition or insignificant value addition - The intermediary is used to break a transaction into two different parts, which parts when viewed in isolation would not satisfy the requirements of section 92A - The legal form of the transaction in such circumstances is ignored - The substance of the transaction is given effect to, not by disregarding the existence of the intermediary but by deeming the transaction with the intermediary itself to be one with an associated enterprise - The legal fiction created in respect of the specified transaction can be used only for the purpose of examining whether such transaction constitutes an international transaction u/s 92B(1). The primary condition for attracting transfer pricing provisions is that there should be a transaction between two or more AEs in terms of section 92A(1) and 92A(2) of the Act the transactions between the assessee and IJMII do not fall u/s 92B(2) of the Act - the DRP simply wants to keep the matter alive, though they agreed with the assessee s counsel, and confirmed the order of the TPO (AO) Decided against Revenue.

Summary

Issues Involved:
1. Legality of the Dispute Resolution Panel (DRP) order.
2. Applicability of Section 92B(2) of the Income Tax Act, 1961 to transactions between the assessee and IJM India Infrastructure Limited.
3. Validity of reassessment proceedings under Section 148 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Legality of the Dispute Resolution Panel (DRP) Order:
The revenue contended that the DRP erred in law and on facts, arguing that the transactions between the assessee and IJM India Infrastructure Limited (IJMII) should fall under Section 92B(2) of the Income Tax Act, 1961. The DRP, however, had deleted the addition under Section 92CA of the Income Tax Act, 1961, holding that the transactions were not international transactions as both entities involved were domestic companies.

2. Applicability of Section 92B(2) of the Income Tax Act, 1961:
The assessee, a Private Limited Company promoted by IJM (India) Infrastructure Ltd. and Andhra Pradesh Housing Board, contended that the transactions with IJMII do not fall under the purview of Section 92B of the Income Tax Act, 1961, as both entities are domestic companies. The Tribunal referred to its earlier decision in the assessee's own case for AY 2007-08, where it was held that:
- Both the assessee and IJMII are residents of India and pay taxes in India.
- The transactions did not involve transfer of goods or services to a non-resident enterprise.
- The Andhra Pradesh Housing Board, being a statutory body, performed governmental functions, and its policies were controlled by the Andhra Pradesh Government, implying no undue influence from IJM Group.
- Transfer pricing provisions were not applicable to transactions between two domestic related parties until the amendment through Finance Act, 2012.

The Tribunal reiterated that the primary condition for attracting transfer pricing provisions is that there should be a transaction between two or more associated enterprises, at least one of whom is a non-resident. Since both parties were residents, the transactions did not constitute international transactions under Section 92B(1) and the deeming fiction under Section 92B(2) did not apply.

3. Validity of Reassessment Proceedings under Section 148 of the Income Tax Act, 1961:
The assessee argued that the reassessment proceedings were invalid as the reasons recorded for issuance of notice under Section 148 were not furnished despite a specific request. Additionally, there was no tangible fresh information to suggest that income had escaped assessment, and the reassessment was based on a mere change of opinion. The Tribunal did not delve deeply into this issue, as it resolved the matter based on the applicability of transfer pricing provisions.

Conclusion:
The Tribunal upheld the DRP's order, confirming that the transactions between the assessee and IJMII did not constitute international transactions under Section 92B(1) of the Income Tax Act, 1961, and the deeming fiction under Section 92B(2) did not apply. Consequently, the appeal of the revenue was dismissed, and the DRP's decision to delete the addition under Section 92CA was upheld. The reassessment proceedings issue was not specifically addressed, as the primary contention was resolved in favor of the assessee. The appeal was dismissed in its entirety.

Pronouncement:
The judgment was pronounced in the open court on 09 June, 2014.