Transaction amongst Indian PE of foreign co. and another resident entity isn’t an ‘international transaction’

Substance over form rule under section 92B(2) applies only when third party is interposed in international transaction (‘IT’) between two associated enterprises (‘AEs’).

Transactions between resident assessee and resident AE of foreign parent company can't be deemed as IT by invoking the substance over form rule under section 92B(2).

The Tribunal held as under:

1) The primary condition for attracting transfer pricing provisions is that there should be a transaction between two or more AEs. Section 92A defines the term "AEs". Section 92A(1) provides the broad parameters on satisfaction of which two or more enterprises constitute AEs;

2) Sub-section (2) of section 92A enlists specific situations which make two or more enterprises associates of each other for the purposes of sub-section (1). One of the essential limbs or constituents of an IT is "AEs".

3) The deeming fiction under section 92A(2) are limited to the parameters of management, control or capital. Section 92B(2)travels beyond these parameters. Though section 92B(2) is a part of section 92B with the heading "Definition of IT", yet it is to be read as an extension of section 92A(2) and not as an extension of section 92B(1);

4) Section 92B(2) only deems certain transactions to be 'transactions between AEs' and not as 'IT between two enterprises'. Section 92B(2) was enacted to hit at those cases where two AEs intend to have an IT but want to avoid transfer pricing provisions by interposing a third party as an intermediary. In such cases, the third party intermediary will generally not be the ultimate consumer of the services or goods;

5) The intermediary would facilitate the transfer of services or goods from one enterprise to its AE with no value addition or insignificant value addition. The intermediary is used to break a transaction into two different parts, which when viewed in isolation would not satisfy the requirements of section 92A;

6) The legal form of the transaction in such circumstances is ignored. The substance of the transaction is given effect to, not by disregarding the existence of the intermediary but by deeming the transaction with the intermediary itself to be one with an AE;

7) The legal fiction created in respect of the specified transaction can be used only for the purpose of examining whether such transaction constitutes an 'IT' under section 92B(1)? In case section 92B(1) is not attracted, the fiction under section 92B(2) ceases to operate - IJM (INDIA) INFRASTRUCTURE LTD. V. ACIT (2013) 37