Tribunal – Special Bench Ruling:

The ruling / observations of the Hon’ble Ahmedabad Tribunal – Special Bench is summarised as below:

• The TP Regulations are enacted to prevent shifting of profits outside India.

• The global income of India enterprise (including foreign PE) is taxable in India and therefore, it is revenue neutral. Hence, not subject to TP Regulations.

• For the purposes of ruling / observation, the Special Bench of Hon’ble Ahmedabad Tribunal has relied on the crux of the matter as to whether unrelated party would have taken up obligation of rendering onshore services at loss.

• PE is a distinct and separate enterprise from HO:
  • Rejected the argument that PE is a subset of foreign enterprise and hence, cannot be considered as a separate person / enterprise.
  • As per the definition of term ‘enterprise’[1], there is a clear distinction between enterprise and person.
  • As per the DTAA[1], PE has to be treated as a distinct and separate enterprise for the purposes of profit attribution.

• Whether transaction between foreign HO and Indian PE is an international transaction[1]:
  • The PE carries the residential status of HO. Accordingly, foreign enterprise and its Indian PE, both are non-residents (NRs) of India.
  • The transaction between NRs i.e., foreign HO and Indian PE are pursuant to an arrangement or understanding between the two separate enterprises which has impact on the income and hence, the basic test of the definition of the term ‘international transaction’ gets satisfied.

• • DIT(IT) vs. Morgan Stanley & Co (292 ITR 416) (SC)
  •  Section 92F(iii) of the Act
  •  Article 9 read with Article 7(2) of the India – China DTAA
  • Section 92B(1) of the Act

• • Indian enterprise and its foreign PE, both are tax residents of India and hence, outside the ambit of section 92B(1) of the Act.

• Whether PE is an Associated Enterprise:
  • The provisions of section 92A(1) and 92A(2) of the Act are required to be read together.
  • Hence, unless the conditions of section 92A(2) of the Act are not fulfilled, the two enterprise cannot be said to be Associated Enterprise.
  • The conditions of clause (h) or (i) of section 92A(2) of the Act may get satisfied in the case of transaction between an Indian PE and foreign HO.
  • Accordingly, foreign HO and Indian PE may become associated enterprises subject to TP Regulations.
• However, the applicability of above clauses may be subject to facts and circumstances of each case.TP provisions are special anti-avoidance provisions of the Act, and hence, they will override all other provisions of the Act. Accordingly, the argument that the definition of ‘income’ under the Act is not amended to include the T.P. adjustment as an income is not valid.
• [1]The transaction between Indian PE and Indian customer may be regarded as ‘deemed international transaction’[1] subject to TP Regulations as the terms of the transaction are in substance determined by the foreign HO and Indian customer.

KNAV Comments:

• The above judgement of Hon’ble Ahmedabad Tribunal (Special Bench) provides in-depth clarity regarding applicability of TP Provisions to Indian PE of foreign enterprise.
• Accordingly, the transactions between Indian PE and HO are subject to compliances and arm’s length analysis as per the TP Regulations contained in Chapter X of the Act.
• If arm’s length remuneration is attributed to an Indian PE after taking into consideration all the risk-taking functions, no further attribution will be required to such Indian permanent establishment.
• As per the Pillar Two approach introduced by OECD, a PE is considered as a distinct and separate constituent entity.

• Toyota Kirloskar Motors (P) Ltd vs. ALIT (28 taxmann.com 293) (Bang. ITAT)
• Section 92B(2) of the Act
• DIT(IT) vs. Morgan Stanley & Co (292 ITR 416) (SC)

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