International Transactions-Transfer Pricing

1. Taxpert Professionals
Transfer Pricing - BE IN THE KNOW
Topic- INTERNATIONALtransactions

2. Introduction
With the world turning into one global entity, trade and commerce has increased leaps and bounds. Along with the benefits it carries, there are many
complex issues which need to be addressed. One of these issues is tax evasion and base erosion. Transnational Enterprises arrange their transactions in
a way to evade tax or disguise the transactions to reduce their tax liability. This results in loss of revenue for the countries where such enterprises are
based. To curb such practises Transfer Pricing Regulations were introduced in the year 2002. Chapter X of Income Tax Act, 1961 (hereinafter referred
as the Act) contains the provisions for Transfer pricing.

3. International Transactions
To invoke the provisions of Chapter X, it is obligatory to prove the existence of an international transaction. Therefore it is necessary to understand
the crux of the definition of International transaction.
As per section 92B of the Act, international transaction means a transaction between two or more associated enterprise, either or both of whom are
non-residents in the nature of :-

4. Let us analyze the definition of International transaction.
 It is a transaction: - the word transaction has been defined under section 92F of the Act. It entails that the term transaction includes an arrangement,
understanding or action in concert, irrespective of whether it is formal or in writing or whether or not it is intended to be enforceable by legal
proceedings.
IN THE NATURE
OF
Purchase, sale or lease
of tangible or
intangible property
Provisison of services
Lending or borrowing
of money
Any other transaction
having bearing on
profits income or
losses or assets of
such enterprises
Mutual agreement or
Arrangemnet between
two or more AEs for
allocation or
apportiment of, or any
contribution to, any
cost or expense
incurred

5. Whether a verbal arrangement which is not legally enforceable is capable of amounting to transaction or arrangement? – YES (R. v. Dairy Produce
Quota Tribunal for England and Wales)
Whether a pure reimbursement of expense to AE not involvinganyprofit mark-upwould be a transactionand consequentlyaninternationaltransaction?
– YES (Stream international Services Pvt Ltd v. ADIT (IT)[2013]Mumbai Tribunal)
Whether a framework agreement whereby foreign folding company is granted call options to acquire shares for consideration paid by foreign holding
co. is a transaction and consequently an international transaction? – YES (Vodafone India Services Pvt Ltd .v. Asst CIT [2014])
 The transaction needs to be between two or more associated enterprises (AEs)( as defined under Section 92A) or deemed to be between 2 or more AEs
under the provisions of Section 92B (2).
 Either or both of these associated enterprises should be Non-residents:- When the assessee and the AE are both residents for the purpose of taxation,
transactionbetweenthem cannot be regarded as internationaltransaction. Thereforeit is necessaryfor a transactionto fallwithin the purviewof section
92B (1) which means that both the sub-sections of Section 92B of the Act operate jointly. (The concept of deemed AE shall be dealt later in this article)
Whether a transaction wherein an assessee company and company providing management services to it were both residents in India shall be considered
as an international transaction? NO (Astrix Laboratories Ltd v. Asst CIT [2015] Hyderabad Tribunal)
Whether a transaction wherein payments were made by the assessee Indian Agent of foreign TV channels to Indian residents by way of advertisements
and public advertisements are international transactions? NO (CIT V. NGC TV Network (India) Pvt Ltd [2014])
Whether the assessee (WOS of USA company) rendering installation and commissioning services to Indian customers and there was no agreement
between Indian customers and the parent company amounts to international transaction? NO (CIT V Stratex Networks (India) Pvt Ltd [2013])
 The transactions can be in the nature of different type of transactions as illustrated above.
Deemed International Transaction (Section 92b (2) of the Act)
The amendment madeby the FinanceAct 2014 hasintroduceda concept“Deemed International Transaction”whichwillbring in a new era of litigation.
This has widened the horizons of transfer pricing provisions beyond imagination and has turned it into an umbrella legislation covering almost all the

6. international and specified domestic transactions. Now, the transactions between an enterprise and a person other than an associated enterprise
(independent third party) shall be deemed to be an international transaction entered into between associated enterprisesin the following circumstances:
 Existence of a prior agreement in relation to the relevant transaction between such other person and the associated enterprise ; or
 The terms of the relevant transaction are determined, in substance, between such other person and the associated enterprise.
Therefore it can be clearly asserted that transactions between two resident entities are brought within the purview of International transactions on
fulfilment of two conditions laid down in section 92B (2) of the Act. However it has been clear from the approach of tax authorities that not only the
agreements/arrangements will is a determining factor for the applicability of the provisions of deemed transaction but also the actual conduct of the
transacting parties will be taken into consideration.
However it is necessary that at least one of the associated enterprises is a non-resident because if both the enterprises are non-residents
then the Chapter of Transfer Pricing shall apply only if income of one of the non-residents is assessable under the Indian Income Tax.
Illustration :-
Landmark Case law
 Enterprise X of India and Enterprise Y of Australia are associated enterprises.
 Enterprise Z of Singapore is not an associated enterprise of Enterprise X.
 Enterprise Y and Enterprise Z enter into an agreement for determining the terms of transactions between Enterprise X and
Enterprise Z
 The transaction as may be entered between Enterprise X and Enterprise Z which is governed by such an agreement existing
between Enterprise Y and Enterprise Z shall be deemed to be an international transaction.
 Here the transaction satisfies all the conditions of section 92B (2) as well as 92B (1).

7. Kodak India Private Limited Vs Addl. Commissioner of Income-tax [2013] (Mumbai tribunal)
Facts:
 Eastman Kodak Co. USA entered into an agreement with Carestream Inc, USA for sales of its medical imaging business stream on global basis.
 Pursuant to this agreement, Kodak India entered into an agreement with Carestream Health India Private Limited (‘Carestream India’) for sale of its
medical imaging business.
 Terms and consideration of sale were independently determined by Indian companies without any influence by agreement between overseas holding
companies.
 During the course of assessment proceedings, TPO treated the transaction of sale of imaging business segment by Kodak India to Carestream India as
‘deemed international transaction’ under Section 92B (2) of the Act and proceeded to make upward adjustment for the same.
 This adjustment was made by TPO without application of any of the method specified under Section 92C of the Act.(computation of ALP)
 When the assessee approached the DRP, it upheld the order of the TPO.
 Aggrieved by the order of the DRP & TPO, Kodak India filed an appeal before the Mumbai Tribunal.
Judgement of the Mumbai Tribunal
 After hearing arguments of both the parties, Mumbai Tribunal held that transaction of sale of imaging business by Kodak India to Carestream India
cannot be considered as ‘deemed international transaction’ on the ground that:
 Both the transacting entities are domestic entities which are resident in India;
 Even though the transaction of sale of imaging business segment in India is in consequence of global agreement between overseas holding
companies, there was no prior agreement and/ or terms and conditions for sales were not dictated by non-resident agreement; and
 TPO has not applied one of the method specified under Section 92C (2) read with Rule 10B, while arriving at the amount of TP adjustment.
Aggrieved by the order of the Mumbai Tribunal, the tax department approached the Bombay High court. Key question of law before consideration
of Bombay HC was ‘whether provisions of section 92B (2) are applicable to sale transaction between two domestic companies?’
Judgement of Bombay High Court
 Bombay HC noted that Revenue authorities have accepted the observations of the Tribunal on two counts –
(1) Terms of sale of business were independently determined by Indian entities without any influence by global agreement and
(2) Assessee had reasonably determined the arm’s length price, while Revenue Authorities had not used one of the prescribed methods and hence,
matter cannot be remanded back for determination of arm’s length price.

8.  Based on these factual aspects, Bombay HC held that appeal under consideration is academic in nature since there would not be any adjustment on
Kodak India even if question is answered in favour of tax department and hence, Bombay HC dismissed the appeal filed by tax department
without providing any ruling on the question of law.
Other case laws
LG Electronics India Pvt Ltd .v ACIT [TS-11-ITAT-2013 (DEL)-TP]
Novo Nordisk India .v. DCIT, 30 July, 2015
FACTS
 Assessee Entered into a Technical Assistance and
Royalty Agreement with its Korean AE (LG
Electronics Inc)
 Under this agreement assessee obtained right to use
technical information , designs etc for manufacturing
sales etc. & also used AE’s trademarks.
 TPO opined that assessee was promoting “LG” brand
owned by its foreign AE and hence should have been
adequately compensated by its AE
JUDGEMENT
 ITAT special bench (by majority view) held that there
was a transaction between the assessee and the foreign
AE (i.e. LG Korea)
 Under this transaction the assessee incurred AMP
expenses towards promotion of brand which is legally
owned by its foreign AE.
 It further laid down that even if there is no express
agreement between assessee and its AE, if the facts
indicate that the Indian Entity incurred AMP expenses
for brand promotion of itsforeign AE, thesame should
be considered as an oral or implied transaction (section
92F of the Act)
 Therefore brand building by assessee for foreign AE
was in nature of provision of service u/s 92B & hence
it is an international transaction

9. FACTS
 The resident unrelated enterprise (third party)
purchased raw materials namely insulin crystals from
overseas entity Novo Nordisk Denmark.
 The resident unrelated enterprise manufactured insulin
formulations as per specification and knowhow
supplied by Novo Nordisk Denmark.
 These insulin formulations were sold to the assessee
(Novo Nordisk India) at a rate fixed by Novo Nordisk
Denmark.
 The assessee claimed that the purchase and sale of
insulin formulation in the market was a separate
transaction in nature of trading and did not report it as
an international transaction.
 The department, however, contended that the
transaction of purchase of insulin was deemed to be a
transaction between the associated enterprises.
JUDGEMENT
 The tribunal held that the sum and substance of all
agreements was to enable supply of raw materials by
the overseas AE, manufacture the formulation and sell
it in India.
 It had been so arranged that the provisions of section
92B of the Act were not attracted.
 Sincethe overseasAE waspart of the arrangement, the
requirement of one party being a non-resident was
satisfied.
 Therefore transaction of supply of raw material was an
international transaction.

10. ITO v Tianjin Tianshi India Pvt Ltd [TS-231-ITAT – 2011(Del)]
FACTS
 The assessee is an Indian resident, engaged in the
business trading/distribution of food supplements and
health care equipment.
 It is one of the group companies of TIENS, a Chinese
group of companies.
 The concerned products are manufactured abroad by
the assessee’s group concerns.
 One of the group concerns Tianjin Tianshi Biological
Development Company Ltd (TTBDC) had established
a PE in India.
 For AY 2006-07 , The assessee made some purchases
from TTBDC
 TPO made an adjustment in respect of the purchase
price paid to the AE.
 On first appeal CIT (A) deleted the TP adjustment,
holding that no cross border transaction were involved
and entity making sales to assessee (through its PE).
JUDGEMENT
 The Delhi ITAT held that the transaction was indeed an
International Transaction u/s 92B.
 ITAT observed that for a transaction to fall u/s 92B (1),
one or more parties has to be a non-resident.
 ITAT held, where either or both of the AEs are non-
resident, (that) would amount to an international
transaction within the meaning of Section 92B (1) of the
Act. It does not matter that the transactions in question
are not cross border transactionasenvisagedby CIT (A).
 In view of the clear provisions of Section 92B (1) and
Section 92 (1), there is no requirement to prove any
motive to shift profits outside India or to evade taxes in
India.
 ITAT also held that the CIT (A) had erred in relying on
the fact that no such finding was recorded by the AO.

11. Conclusion
The definitionof InternationalTransactionhas gainedutmost importance under the transfer pricing provisions asthe preliminaryrequirement to invoke
the provisions of chapter X is to prove the existence of an “International Transaction” and this makes it essential to understand the meaning of
International transaction.

12. About Transfer Pricing:
In the globalised environment where business houses are getting smart the tax authorities are getting smarter with Indian transfer pricing regime getting closer
to global best practices day by day by importing the concepts like BEPS (Base Erosion and profit shifting), thin capitalisation and secondary adjustments either
taking birth or getting adopted. With the newer ways of doing business in global space it is essential that all the business strategies are aligned to proper and
planned taxation policy.
With ever increasing cross border transactions, it is essential that the Transfer pricing policies and solutions are tailored made to needs, uncomplicated,
innovative, effective, forward-thinking, complaint and practical to implement.
We at taxpert professionals have dedicated team for handling the International Transaction Advisory services. We have handled most complicated cases in the
most seamless manner. We have perfect blend of professionals which provide the spectrum of services in the area customised to the needs of our clients. We
have lot of esteemed business houses, NRI, HNI as our clients. We always strive for the best for our clients.
About Taxpert Professionals:
Taxpert Professionals is a conglomeration of multi-diverged professionals known for providing concentrated services in relation to taxation and corporate
laws in a seamless manner. Taxpert professionals believe in the creation of value through advising and assisting the business. At Taxpert the pool of
professionals from different spectrum like tax, accountancy, legal, costing, management facilitate the conversion of knowledge into beneficial transaction.
About CA. Sudha G. Bhushan :
Sudha is qualified Chartered Accountant and a Company Secretary with more than a decade of experience in the Foreign Exchange
Management Act, RBI, Transfer pricing and International taxation matters. She is a noted speaker and author.
Her articles are regularly published in the Journals of several institutes and at various other forums and has authored the following books:
Practical aspects of FDI in India published by Institute of Company secretaries of India
Due Diligence under Foreign Exchange Management Act, 1999 published by CCH.
Comprehensive Guide to Foreign Exchange Management in two volumes published by CCH.

13. Practical Guide to Foreign Exchange Management published by CCH, a Walter Kluwers company.
Handbook on FEMA, Publication of Institute of Chartered Accountants of India
A scholar through out her life she has been awarded many awards and recognitions including “Women Empowerment through CA Profession” by Northern
India Regional Council (NIRC) of Institute of Chartered Accountants ofIndia (ICAI). Backed by experience in International firms she has extensive experience
of handling international transactions. She advises corporate as well as government authorities in lot of intricate transactions. Rendering tax and regulatory
advisory services, she has overseen and played a crucial role in the execution of complex international transactions involving issues revolving around tax,
repatriation, minimization of tax exposure, Foreign Investment (Inbound and outbound) etc.