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.

Facts:

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.)

Longer credit period allowed to AE on realization of sale proceeds would be an international transaction under TP

Longer credit period to AE is 'international transaction' in terms of Explanation to section 92(1) but same is 'closely linked' to international transaction of sale or service to AE in terms of Rule 10A(d). This is not a transaction of loan or advance to the AE but is only an excess period allowed for realization of sales proceeds from the AE. Therefore, the arm's length interest rate would be the average cost of the total fund available to the assessee and not the rate at which a loan is available.

The issues that arose before the Tribunal were as follows:

a)Whether allowance of longer credit period to AE could be treated as an international transaction in terms of Explanation to section 92(1)?

b)Whether allowance of longer credit period to AE could be treated as transaction of loan or advance to AE so as to determine arms’ length interest rate at a rate at which a loan was available?

The Tribunal held as under:

1)After the insertion of Explanation to section 92B(1), the payment or deferred payment or receivable or any debt arising during the course of business would fall under the expression international transaction. Thus, in view of the expanded meaning of the international transaction, the delay in realization of dues from the AE in comparison to non-AE would certainly fall in the ambit of international transaction.

2)As per Rule 10A(d) if a number of transactions are closely linked or continuous in nature and arising from a continuous transactions of supply of amenity or services the transactions is treated as closely linked transactions for the purpose of transfer pricing and, therefore, the aggregation and clubbing of closely linked transaction are permitted under said rule.

3)When the transactions are influenced by each other, particularly in determining the price and profit involved in the transactions, then those transactions can safely be regarded as closely linked transactions.

4)In the instant case, the credit period extended to the AE was a direct result of sale transaction. The sale price of the product or service determined between the parties would always influenced by the credit period allowed by the seller. Therefore, the transaction of sale to the AE and credit period allowed in realization of sale proceeds were closely linked.

5)When the assessee was not making any difference for not charging the interest from AE as well as non-AE then the only difference between the two could be considered as the average period allowed along with outstanding amount.

6)If the average period multiplied by the outstanding amount of the AE was at arm's length in comparison to the average period of realization and multiplied by the outstanding from non-AEs then no adjustment could be made being the transaction was at arm's length.

7)The transaction in question was not a transaction of loan or advance to the AE but it was only an excess period allowed for realization of sales proceeds from the AE. Therefore, the arm's length interest in any case would be the average cost of the total fund available to the assessee and not the rate at which a loan was available. - GOLDSTAR JEWELLERY LTD. V. JCIT [2015] 53 taxmann.com 353 (Mumbai - Trib.)

Corporate guarantees are outside the ambit of international transaction even after retro amendment to sec. 92B

The Tribunal held as under:

1)    Capital financing transactions (covered by the Explanation to section 92B) are international transactions only if they have any real bearing as distinct from contingent effect on the profits, income, losses or assets of the enterprise;

2)    When an assessee extends an assistance to the Associated Enterprise (AEs), which does not cost anything to the assessee, such an assistance or accommodation will not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction under section 92B(1).

3)    Corporate guarantees issued for the benefit of AEs do not cost anything to the issuing enterprise and yet it might provide certain comfort levels to the parties dealing with the AEs;

4)    These guarantees do not have any impact on profits, income, losses or assets of the enterprise. Therefore, corporate guarantees do not fall within the scope of the term 'international transaction' even after insertion of Explanation to section 92B by Finance Act, 2012 with retrospective effect from 1-4-2002.- Bharti Airtel Ltd. v. ACIT [2014] 43 taxmann.com 150 (Delhi - Trib.)