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Tax Publishers 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.

Tax Publishers

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.