Associated enterprise & Deemed Associated Enterprise - Transfer Pricing

1. Taxpert Professionals
Transfer Pricing - BE IN THE KNOW

2. ASSOCIATED ENTERPRISE & DEEMED ASSOCIATED
ENTERPRISE

3. Introduction
Transfer Pricing provisions are special anti-avoidance rules contained in Chapter X of the Income Tax Act, 1961(hereinafter referred as the
Act).Section 92 is the most pivotal section as it embarks upon the applicability of Transfer Pricing Regulations .According to section 92 “All income
or expense arising from an international transaction to be computed having regard to Arm’s Length Price”. International transaction (as defined
under section 92B (1) of the Act ) means a transaction between two or more Associated Enterprise (AE), either or both of who are non-residents.
Therefore it becomes necessary to untangle the mystery of the definition of AE given under the Act.
Associated Enterprise (AE)
Section 92A of the Act defines “Associated Enterprise”. It entails that one enterprise is an associated enterprise of another on fulfillment of two
conditions:-.
1. Participation of one of the enterprise (direct or indirect), or through one or more intermediaries, in the management or control or capital of the
other enterprise. [Section 92 (1) (a)]
.
❖ According to the above example Enterprise X and Enterprise Z are AEs.

4. 2. Same person (s) participates (directly or indirectly), or through one or more intermediaries, in the management or capital or control of both the
enterprise. [Section 92 (1) (b)]
❖ According to the above example Enterprise B & Enterprise C are AEs.

5. Deemed Associated Enterprises
Many clouds surround the concept of “Deemed Enterprise”, however it’s not as complicated as it seems. Section 92 A (2) creates a fiction wherein
on fulfillment of any of the conditions [(a) to (m)] enlisted in the section, the enterprises involved are deemed to be associated enterprise.
1. One enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise.
2. Any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises.
3. A loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other
enterprise.
4. One enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise.
5. More than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the
governing board of one enterprise, are appointed by the other enterprise.
6. More than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board,
of each of the two enterprises are appointed by the same person or persons.
7. The manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents,
copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or
specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of
which the other enterprise has exclusive rights.
8. 90 % or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise,
are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are
influenced by such other enterprise.
9. The goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise,
and the prices and other conditions relating thereto are influenced by such other enterprise.
10. One enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and
relative of such individual.
11. One enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a
relative of a member of such Hindu undivided family or jointly by such member and his relative; or
12. One enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm,
association of persons or body of individuals.
13. There exists between the two enterprises, any relationship of mutual interest, as may be prescribed.

6. Interpretation of Section 92A of the act
The challenge faced by the assesses is the interpretation of this pivotal section. This section is broken down into two parts. The first part speaks
about enterprises being AE when one such enterprise, directly or indirectly participates in the management or capital or control of other enterprise.
However, the irony of this section is that the most important words “management”, “capital” and “control” aren’t defined under the Act.
The second part lays down 13 conditions wherein on fulfilment of any of these conditions, the enterprises shall be deemed to be AEs
This section can be interpreted in three ways namely:-
❖ Section 92A(1) & Section 92A(2) operate independently which means that on fulfilment of any one of the conditions laid therein the enterprises
shall be considered as AEs.
❖ Section 92A(1) & Section 92A(2) operate jointly which means that on fulfilment of both the conditions laid therein the enterprises shall be considered
as AEs.
❖ Section 92A lists down the conditions to be fulfilled in order to be considered as AEs which restricts the ambit of sub-clause (1) of Section 92A.
The amendment made to section 92A by Finance Act 2002 proved to be a boon. The words “For the purpose of sub-section 1” were inserted at the
beginning of sub-section (2).The memorandum to Finance Act 2002 further provided an explanation that it is necessary for the AE to satisfy both
conditions laid down in sub-section (1) & (2) of section 92A.The mere fact that an assessee participates in the management or control or capital of
an enterprise is not a conclusive proof of it being an associated enterprise.
Case Laws
The judiciary in India has been playing an active role in interpretation of statues. The judiciary has thrown light upon the concept of AEs and deemed
AEs in these landmark judgements given below:-
1. Diego India Pvt Ltd Ltd v. Dy. CIT (ITAT Mumbai)
❖ The concept of AE & deemed AE was thoroughly examined in this case.
❖ The true test of associated enterprise, thus, is control by one enterprise over the other, or two or more associated enterprise by a common interest.
Such a control is essentially an effective control in decision- making process.
❖ The definition of associated enterprises in section 92(1) (a) and (b) is, what can be termed as, basic rule.
❖ Sub-section (2) of section 92A widens the scope and meaning of the expression “Associated Enterprise” given under sub-section (1)
❖ Sub-section (2) covers only specific cases i.e. It has no general or universal application in respect of the term AE.
2. Kaybee Pvt Ltd v ITO
❖ In this case the director (G) holding 99.9% of shares of the assessee company was also the director and CEO of a Singapore company (K Ltd) and
was a part of decision making process of both the companies.
❖ The assessee contended that Kaybee Singapore and the assessee cannot be classified as AEs as the case of the assessee did not fall in any of the
clauses of sub-section (2), and post the 2002 amendment in section sub-section (2), satisfaction of any one of the clauses of said sub-section (2) is
mandatory for the entities to be so classified.

7. ❖ On the other hand, revenue contended that section sub-section (2) only expands the scope of sub-section (1) and creates a deeming fiction to cover
only those instances which do not fall within sub-section (1).
❖ The question before the tribunal was whether both these companies are AEs or not.
❖ The ITAT( Mumbai) relying on tribunal’s judgment in Diego India Pvt Ltd v. Dy. CIT, it held that G was a common director in both the companies
and participates in the management of both the companies not for namesake but holds a key position.
❖ Therefore, the satisfaction of the basic condition “one enterprise participates directly or indirectly or through one or more intermediaries” was
fulfilled hence the assessee and K Ltd fell within the meaning of AE as per the provisions of Section 92A.
3. M/s. Page Industries Ltd. vs. DCIT (ITAT Bangalore)
❖ In this case the assessee had entered into a licensing arrangement with Jockey International Inc, USA (“JII”), to become a licensee of the brand-
name ‘Jockey’ for the exclusive manufacturing and sale of Jockey readymade garments.
❖ The assessee was liable to pay a royalty in lieu of such right.
❖ The assessee contended that there was no existence of relationship of AE between the assessee and JII.
❖ The revenue was of the opinion that the case of the assessee fell within clause (g) of sub-section (2) of section 92A.
❖ The ITAT held that the 2002 amendment implies that unless conditions of sub-section (2) are satisfied, sub-section (1) cannot be applied.
❖ Tribunal has gone to the extent of holding that any of the three primary conditions, viz, “management”, “control” or “capital” as mentioned in
Section 92A (1) has to be fulfilled even if one of the 13 criteria as mentioned in sub-section (2) are fulfilled.
❖ It means that to establish “AE” relationship, both, sub-sections (1) and (2) are required to be satisfied
❖ An opinion that AE relationship exists whenever requirement(s) of sub-section (2) are fulfilled would render the provisions of sub-section (1) otiose
or superfluous.
❖ It is a well settled position that a construction which renders a particular provision otiose should not be adopted while interpreting a taxing statute
and a construction, which preserves the purpose of the provision, must be adopted.
❖ Therefore, since the criteria of sub-section (1) relating to participation in “management, control, or capital” were not satisfied, therefore, the assessee
and Jockey USA were not “AEs.
The Mumbai tribunal has adopted a wider interpretation of the section 92A according to which sub section (1) and (2) of section 92A act
independently whereas as the Bangalore tribunal adopts a comparatively narrower view requiring satisfaction of both the sub-sections. However this
issue of contradictory judgements can be settled only by the interpretation endorsed by the High Courts or the Apex court.
Conclusion
It is necessary for the assessee to carefully adopt the interpretation of this section as non-compliance of transfer pricing provisions can attract
penalties and lead to enormous litigation expenses. Therefore it is wiser to adopt a wider interpretation of this section and comply with all the transfer
pricing provisions.

8. 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 are 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
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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.
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 throughout 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 of India (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.
She is on the Board of many esteemed listed companies as Independent director. She is member of Committee of International Taxation
of WIRC, ICAI, Member of Editorial Committee of WIRC of ICAI and Committee of women empowerment of ICAI.
She can be contacted at sudha@taxpertpro.com || 09769033172