Tuesday, February 17, 2015

Transactions between head office and foreign branch aren't international transactions under TP provisions

Transactions between head office and its foreign branch could not be deemed as international transactions under Section 92B since branch office was not a separate entity distinct from assessee-company.


a)Assessee, an Indian company,had entered into international transactions with its branch office located in Canada.

b)In computation of the arm’s length price, the assessee inadvertently considered transactions with its branch in Canada as international transactions. The TPO selected some comparable cases and determined their average operating profit rate.

c)Assessee raised objection before Tribunal that transactions with branch office were not in the nature of transactions with AEs and, hence, same should have been excluded.

Tribunal held in favour of assessee as under:

1)Section 92B(1) provides that an "international transaction" means a transaction between two or more associated enterprises….”. A bare perusal of the definition of 'international transaction' brings to light that for treating any transaction as an international transaction, it is essential that there should be two or more separate AEs.

2)By considering the definition of 'International transaction' provided under section 92B along with the meaning of the AE given in section 92A, it would clearly emergethat there have to be two or more separate entities in order to describe a transaction as an 'international transaction'.

3)When the assessee was only one entity dealings with the head office and its branch office, such inter se dealings ceased to be commercial transactions in the primary sense, as the pre-requisite condition for an 'international transaction' isthat transaction has to be between two or more associated enterprises.

4)Since the branch office in Canada was not a separate entity, distinct from the assessee, the transactions between the head office and its branch could not be considered as an international transaction under Section 92B. - AITHENT TECHNOLOGIES (P.) LTD. V. ITO- [2015] 54 taxmann.com 261 (Delhi - Trib.)