Regus Business Centre (P) Ltd. v. ACIT [I.T.A. No.
6847/Mum/2018, dt. 1-9-2020] : 2020 TaxPub(DT) 3539 (Mum.-Trib.)
Deemed to be an international transaction -- Scope of
section 92B(1) and (2)
Facts:
Assessee had certain transactions with its domestic related
enterprises. The relationship had risen between the assessee and these domestic
enterprises thru the common holding parent based out of Mauritius. TP additions
were made on the transactions between the assessee which was upheld by the DRP.
The plea of the assessee was prima facie these were not deemed
international transactions in the first place thus outside the scope of TP
provisions not warranting thereto. On higher appeal -
Held in favour of the assessee that the transactions were
not deemed international transactions.
The sub-section (2) to section 92B was amended by the
Finance (No. 2) Act, 2014 with effect from 1-4-2015. By way of amendment the
words "deemed to be a transaction" were replaced with "deemed to
be an international transaction". After the amendment, the transactions
that escaped deeming provisions hitherto were brought within the realm of
"deemed international transaction". The instant case pertains to
period prior to amendment. Thus, the provisions of section 92B(2) as they were
applicable in the impugned assessment year, would be relevant.
A bare perusal of the meaning of "international
transaction" defined in section 92B(1) would show that a transaction would
fall within the ambit of international transaction if, either or both the associated
enterprises are non-resident. In the present case none of the AEs, i.e.,
neither the assessee nor the domestic group companies with which the assessee
had entered into transaction are non-residents. All the companies are domestic
entities and are subject to tax under the provisions of the Act.
Section 92B(2) of the Act deals with the deeming
provisions. The sub-section would get attracted if :--
The transaction is between an
enterprises and non-AE; and
There is prior agreement in
relation to the transaction; or
The terms of the transaction are
determined in substance between the non-AE and AE.
For invoking deeming provisions, sub-section (2) has to be
read in conjunction with sub-section (1) of section 92B of the Act. Thus, for
sub-section (2) to get attracted, the primary condition would be that at least
one of the entity with which the assessee has entered into transaction should
be non-resident. In the present case, the authorities below have failed to take
note of the fact that the transactions in question are within domestic entities
only. No overseas entity is involved in the transaction. Unless the conditions
set out in sub-section (1) are satisfied, the provisions of sub-section (2)
cannot be invoked. The authorities below in the present case have erred in
invoking deeming fiction solely on the premise that since shareholders of
overseas holding company are holding shares of the assessee and AEs, 'in
substance' the transaction between the assessee and the domestic group entities
would fall within the ambit of "deemed international transaction".
Deeming provisions cannot be invoked by expanding the latitude of expressions
used in the section. The authorities below have failed to take into
consideration the fact that all group entities are companies incorporated in
India having separate legal existence.
Editorial Note: The
assessment year in the decision is 2014-15 the amendment in the statute under
section 92B(2) is with effect from assessment year 2015-16. There exist
provisions to disallow excessive expenditure between related parties under
section 40A(2) as to why these were not involved is unknown. Perhaps the
revenue got clouded by the continuing tendency to make high pitched additions
in TP cases more so than in section 40A(2) additions. But the limitation of
section 40A(2) is it covers "any expenditure" but not capital
transactions which otherwise can be brought into some form of a tax ambit if
their ALP is not in alignment with market realities by making notional
additions as the concept of real income is stranger to TP law to a greater
extent.