Aurtus Insights_TP Alert_SB Ruling

AURTUS INSIGHTS Special Bench ruling on applicability of TP
13 DEC 2024 provisions to transactions between

TRANSFER PRICING ALERT Foreign company and its branch in India
BACKGROUND
• Recently, Special Bench formed at Ahmedabad ITAT delivered a ruling1 on the

issue of applicability of Transfer Pricing (‘TP’) provisions to the transactions
between a foreign company and its branch (Permanent Establishment) in
India.
• The taxpayer is a Project Office (‘PO’) in India of a Company based out of China
(‘Foreign Company’), set up to provide onshore services to the customer of
foreign company in India. In consideration for these services, the customer
made certain payments to the foreign company instead of the taxpayer, since
the taxpayer (PO) did not have a bank account. This was regarded as
‘reimbursement’ by the Assessing Office (‘AO’) and he treated it as
international transaction and referred the matter to Transfer Pricing Officer
(‘TPO’) for determination of arm’s length price.
• The TPO was of the view that the services provided by the taxpayer to
customer are actually services provided on behalf of the foreign company and
hence the act of providing services by the taxpayer on behalf of foreign
company constitutes international transaction between the taxpayer and
foreign company. The TPO observed that the per unit civil work rate received
from customer is less than the rate paid to sub-contractor.
• The matter was presented before the Ahmedabad Tribunal (‘Ahmedabad

ITAT’). The Ahmedabad ITAT observed that there were conflicting views
expressed by division benches on applicability of TP provisions to the
transactions between an enterprise and its Permanent Establishment (‘PE’),
hence, the matter was referred to a Special Bench (‘SB’). The following
question was referred for consideration before the SB:
“Whether or not the transactions between an enterprise and its foreign

permanent establishment can be considered international transactions for
the purpose of section 92B and accordingly can be subjected to the ‘arm’s
length price’ adjustment?”
1 M/s. TBEA Shenyang Transformer Group Company Limited vs. DCIT [TS-508-ITAT-2024Ahd-TP]
1
OBSERVATIONS OF SPECIAL BENCH ON CONFLICTING DECISIONS
• At the outset, SB observed that the question referred before it did not bring
out the exact facts of the case. While the question referred to SB mentioned
about Indian enterprise and its foreign PE whereas the in the facts, the subject
matter transaction was between foreign enterprise and its PE in India. Hence,
SB reframed the question as below:
“Whether or not the transactions between a foreign enterprise outside India
and its Indian permanent establishment can be considered as an
international transactions for the purpose of section 92B of the Act and
accordingly can be subjected to the ‘arm’s length price’ adjustment?”
• Further, the SB first dealt with the issue as to whether there is any conflict
between the views expressed by the divisional benches. In reference order to
the SB, it was stated that there has been conflict in decisions in case of Aithent
Technologies Pvt. Ltd. Vs. DCIT [(2015) 155 ITD 266 (Del)] and Fujifilm
Corporation [(2018) 193 TTJ 716 (Del)]. In this regard, the SB observed as per
below:
Aithent Technologies Pvt. Ltd. (‘Aithent’)

• In case of Aithent, there was a transaction between the Indian Head Office
(‘Indian HO’) and its branch in Canada (‘foreign branch’). There are total three
cases of Aithent that dealt with the same issue of applicability of TP
provisions.
• In two of the cases, the Delhi ITAT held that for a transaction to be considered
an international transaction there should be two or more Associated
Enterprise (‘AEs’), and since branch is not a separate entity distinct from the
Indian HO, the transaction cannot be an international transaction.
• In the third case of Aithent, the Delhi ITAT referred to sec. 92F (iii) of Income
Tax Act, 1961 (‘the Act’) wherein the term ‘enterprise’ is defined as the person
including the PE of such person, and hence foreign branch of Indian HO and
Indian HO are separate enterprises for purpose of TP provisions. Further, the
Delhi ITAT explained that the section loses its substance in case of Indian HO
and foreign branch as the transaction between HO and branch would become
tax neutral, since the Indian HO is liable to tax for its global income. However,
the above view cannot be applied in case of Foreign HO and Indian Branch,
since the non- residents are taxed only on the Indian Income. Hence, the non-
resident may resort to under or over invoicing to mitigate the tax in India.
2
Fujifilm Corporation, Japan (‘Fujifilm’)
• In the given case, the taxpayer was a Japanese enterprise having its branch
office in India and the taxpayer had contended that the branch in India is just
an extension of HO and therefore TP adjustment cannot be made. The Delhi
ITAT referring to sec. 92F (iii) of the Act, observed that the PE i.e., the branch in
India is a separate enterprise for purpose of TP and hence any transaction
between foreign enterprise and its PE in India are subject to TP regulations.
• The Delhi ITAT did not follow the case of Aithent and observed that the
transaction between foreign HO and Indian branch are not tax neutral and if
they are not at arm’s length, it would affect the income chargeable to tax of
non-resident.
• The SB in the present case observed that there is no conflict between these
decisions. Since, in case of Aithent, the transaction was between the Indian
enterprise having foreign branch and the global income of Indian company
was taxable in India, and in case of Fujifilm, where the transaction was
between foreign enterprise having Indian branch, only the Indian income was
taxable.
• The SB further observed that in case of Indian company having foreign branch,
both are tax residents in India. Thus, the condition for sec. 92B(1) of the act
that there should be at least one non-resident party does not get fulfilled.
However, the same condition gets satisfied in case of a foreign enterprise
having Indian branch, since both the parties are non-residents in this case..
DECISION OF SPECIAL BENCH ON REFRAMED QUESTION
• The SB analysed the issue under consideration based on the following

parameters :
– Permanent establishment - a separate enterprise;
– Associated Enterprise as per sec. 92A of the Act;
– International Transaction as per sec. 92B of the Act; and
– Double Taxation Avoidance Agreement (‘DTAA’) vs. the Income Tax Act.
3
1. Whether PE a separate enterprise?
• The taxpayer contended that although the definition of enterprise as per sec.
92F (iii) deems PE as an enterprise, but it does not treat PE separate from the
foreign company and thus TP provisions cannot apply between PE and its HO
or between other units of HO. Further, it also contended that PE is only a
subset of foreign company. The taxpayer relied on the decision of Sir
Kikabhai Premchand vs. CIT (1993) 24 ITR 506 SC, Betts Huett & Co Ltd vs. CIT
(1979) 116 ITR 425 (Cal) & Sumitomo Mitsui Banking Corporation (2012) 19
taxmann.com 364 (Mum SB) for the contention that the transaction with self
cannot trigger any income.
• The SB held that the applicability of TP provisions is linked to being qualified
as an ‘enterprise’ and not a ‘person’. Further, from reading the provisions of
the Act, it is clear that the PE is a separate ‘enterprise’ and transaction
between HO and its PE are between two separate enterprises. It also held
that the decisions relied by the assessee that one cannot generate income by
dealing with self are not applicable in given context.
2. Associated Enterprises as per sec. 92A

• The taxpayer contended that in order to constitute an ‘associated
enterprises’, requirements of sec. 92A (1) as well as of sec. 92A (2), both are to
be fulfilled. It further submitted that the relationship between PE and HO do
not fulfill any of the conditions mentioned in sec. 92A (2) of the Act and thus,
there is no AE relationship between foreign company and Indian HO.
• The revenue submitted that the HO and PE are managed and controlled by
same set of persons and contributed capital. Further, the revenue contended
that few conditions of sec. 92A(2) are met as below:
• 92A(2)(a) – PE is completely owned by HO,
• 92A(2)(b) – Promoters of HO holds directly 100% of shares in HO and PE,
• 92A(2)(c) – Directors of PE are appointed by HO
• 92A(2)(e) – Funds of PE are advanced to HO,
• 92A(2)(g) – HO has complete expertise including drawing, specifications
for power plant.
• The SB observed that the expression ‘participation in management or control
or capital’ as specified in sec. 92A(1) of the Act is not a defined expression. To
find the meaning of the said expression, sec. 92A(2) of the Act has to be
referred and hence the both the sub-sections are required to be read
together.
4
• Further, SB held that the test of holding voting power through shares would
not be satisfied as PE has no independent share capital, same approach can
be applied for appointment of directors. However, SB noted that in these
cases, fulfillment of clauses (g), (h) or (i) of sec. 92A(2)may be a fit check. The
SB directed the division bench to analyse if any of the clauses as mentioned
in section 92A(2) applies in current case.
3. International Transaction as per sec. 92B of the Act

• The taxpayer contended that there is no income arising out of the
international transaction as there was only fund movement between foreign
company, PE and third party.
• In this respect, the SB contended that income in context of TP has to be in
commercial and business sense and whether an independent party would
permit routing its receipts through third party. Further, it also emphasized
that there was an arrangement between the foreign company and PE that
gave rise to loss in the hands of PE. For the income to be covered under ambit
of TP, the transaction has to satisfy the test of 92B(1) or 92B(2) of the Act.
Since, both are non –residents, the basic test of sec. 92B is satisfied.
• Further, the SB noted that in case of sec. 92B(2), the transaction between an
enterprise and unrelated person should have been influenced by the AE and
it can be in the form of prior agreement between the AE and unrelated
person, or the terms of the transactions have to be in substance determined
by AE and unrelated person. The SB directed division bench to also analyse
the applicability of sec. 92B(2) of the Act in present case.
4. DTAA vs the Act

• The taxpayer also contended that the provisions of DTAA override the Act,
and it submitted that as per Article -9 (Associated Enterprise) of India China
DTAA, the profits derived by one enterprise would be subject to TP only
where one of the enterprises is resident of other contracting state i.e., India.
Further, it was submitted that neither HO nor the PE can be termed as
resident and thus transaction between them shall not be subject to TP
considering provisions of Article 9 of DTAA.
• The SB held that the purpose of Article 9 is limited to only confirm that
broadly similar rules exist in domestic law and even if the Article 9 override
the act, the attribution of profits to PE is to be done as per Article 7(2) of DTAA
i.e., in the manner as if the PE were a distinct and separate enterprise.
5
• It further observed that the intention of Article 7(2) and TP provisions is same
wherein both try to analyse as how third parties would have dealt in
uncontrolled conditions. Thus, the contention that there is conflict between
Article 9 and domestic TP was rejected by SB.
The SB on basis of above, concluded that the transaction between foreign

enterprise and its PE in India can be considered as International transaction and
be subject to arm’s length price determination. Further, the matter has been
remanded to divisional bench to give effect to the SB order.
AURTUS COMMENTS
• The applicability of TP provisions to transactions between a branch and HO

has been a subject of significant legal debate and interpretation.
• While the first issue i.e. transaction between India HO and foreign branch was
largely settled, the SB ruling reinforces the prevailing understanding of
provisions.
• On the issue of applicability of TP provisions to transaction between Indian
PE and foreign HO, while it has been consistently held that TP provisions
shall be applicable considering the branch and the foreign HO as ‘separate
enterprise’, however, this rulings attempts to test whether the existing
definition of ‘Associated Enterprise’ covers a company, and its branch is an
interesting dimension, which would need to be tested depending on facts of
each case. Further, applicability of TP provisions to transactions of branch
with third parties from the perspective of section 92B(2) would also warrant
careful analysis.
• Lastly, it would be interesting to see the implementation of above order by
the division bench, with respect to issue of applicability of section 92A(2) and
92B(2).
6
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AURTUS INSIGHTS Special Bench ruling on applicability of TP

13 DEC 2024 provisions to transactions between

• Recently, Special Bench formed at Ahmedabad ITAT delivered a ruling1 on the

• The matter was presented before the Ahmedabad Tribunal (‘Ahmedabad

“Whether or not the transactions between an enterprise and its foreign

Aithent Technologies Pvt. Ltd. (‘Aithent’)

DECISION OF SPECIAL BENCH ON REFRAMED QUESTION

• The SB analysed the issue under consideration based on the following

– Permanent establishment - a separate enterprise;

– Associated Enterprise as per sec. 92A of the Act;

– International Transaction as per sec. 92B of the Act; and

2. Associated Enterprises as per sec. 92A

3. International Transaction as per sec. 92B of the Act

4. DTAA vs the Act

The SB on basis of above, concluded that the transaction between foreign

• The applicability of TP provisions to transactions between a branch and HO

35th Floor, 3502, 160 Robinson

DELHI NCR GIFT CITY

DLF Centre Court, 4th Floor, Pragya,

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