2019 (10) TMI 1547 - AT - Income Tax

Tribunal overturns CIT(A) order, rules domestic transaction not international.

Reach Data Services India Private Limited Versus Office of the Income Tax Officer-13 (3) (1), Mumbai.

The Tribunal allowed the appeal, setting aside the order of the CIT(A) and deleting the addition made by the A.O under Section 92C of the Income-tax Act. ... TP Adjustment - notional interest on the outstanding receivables from a domestic group company - ‘deemed' international transaction - transaction for the purposes of Chapter X of the Income-tax Act, 1961 - Meaning of international transaction u/s 92B. (1) - transaction entered into between two domestic related parties - whether transaction between the Appellant and RNIPL is a deemed international transaction within the meaning of section 92B(2) ? - HELD THAT:- As the requisite conditions for characterising a transaction as an “international transaction” within the meaning of Sec. 92B is not satisfied in the case before us, therefore, we have no hesitation in concluding that san existence of an international transaction, the A.O could not have made an adjustment under Sec.92C of the Act. Our aforesaid view is fortified by the order of the coordinate bench of the Tribunal in the case of M/s Astrix Laboratories Ltd. [2015 (1) TMI 1008 - ITAT HYDERABAD] As the assessee neither falls within the sweep of the meaning of an international transaction as envisaged in sub-section (1) of Sec. 92B, nor is covered by the extended meaning of a ‘deemed‘ international transaction as provided in sub-section (2) of Sec. 92B, therefore, the adjustment made by the A.O under Sec. 92C cannot be principally sustained, and is liable to be vacated. Before parting, we may also observe, that as the provisions pertaining to transfer pricing of specified domestic transactions as envisaged in Sec.92BA of the Act, had been made available on the statute vide the Finance Act, 2012 w.e.f 01.04.2013 i.e from A.Y. 2013-14, therefore, the same would not be applicable to the case of the assessee before us for the year under consideration i.e A.Y. 2012-13. Be that as it may, we may herein observe that it is not even the case of the revenue that the A.O had made the aforesaid T.P Adjustment under Sec.92BA of the Act. On the basis of our aforesaid observations, we delete the addition made by the A.O under Sec.92C of the Act. Accordingly, the order of the CIT(A) is set aside. Decided in favour of assessee. Issues Involved:1. Notional interest on outstanding receivables as a transaction under Chapter X of the Income-tax Act, 1961.2. Classification of the transaction as a deemed international transaction under section 92B(2) of the Act.3. Determination of associated enterprises under section 92A of the Act.4. Validity of the adjustment under section 92C(3) of the Act without using any method under section 92C(1).5. Confirmation of transfer pricing adjustment of Rs. 1,86,17,406/-.Detailed Analysis:1. Notional Interest on Outstanding Receivables as a Transaction Under Chapter X:The primary issue was whether notional interest on outstanding receivables from Reach Network India Private Limited (RNIPL), a domestic group company, constitutes a transaction under Chapter X of the Income-tax Act, 1961. The Assessing Officer (A.O) argued that the assessee company should have charged interest on the receivables, which was not done, and thus, made an adjustment under Section 92C of the Act. However, the Tribunal concluded that since the transaction was between two domestic entities, it did not qualify as an international transaction under Section 92B of the Act.2. Classification as a Deemed International Transaction Under Section 92B(2):The A.O classified the transaction as a deemed international transaction, arguing that the parent company, Reach Holdings, Mauritius, held significant shares in both entities. The Tribunal observed that for a transaction to be deemed international under Section 92B(2), it must involve an enterprise and a person other than an associated enterprise. Since both parties involved were associated enterprises, the transaction did not meet this criterion.3. Determination of Associated Enterprises Under Section 92A:The Tribunal agreed with the lower authorities that the assessee and RNIPL were associated enterprises under Section 92A(2) due to the common shareholding by Reach Holdings, Mauritius. However, merely being associated enterprises does not automatically make their transactions international transactions.4. Validity of Adjustment Under Section 92C(3) Without Using Any Method Under Section 92C(1):The assessee contested the adjustment made by the A.O under Section 92C(3) on the grounds that it was not based on any method prescribed under Section 92C(1). The Tribunal did not specifically address this issue in detail but focused on the broader question of whether the transaction was an international transaction at all.5. Confirmation of Transfer Pricing Adjustment of Rs. 1,86,17,406/-:The Tribunal noted that the adjustment of Rs. 1,86,17,406/- made by the A.O was based on the premise that the transaction was an international transaction. Since the Tribunal concluded that the transaction did not qualify as an international transaction, the adjustment was not sustainable. The Tribunal also noted that the provisions for transfer pricing of specified domestic transactions under Section 92BA were applicable only from A.Y. 2013-14 and not for the year under consideration (A.Y. 2012-13).Conclusion:The Tribunal allowed the appeal filed by the assessee, setting aside the order of the CIT(A) and deleting the addition of Rs. 1,86,17,406/- made by the A.O under Section 92C of the Act. The Tribunal emphasized that the transaction between the assessee and RNIPL being a transaction between two domestic associated enterprises did not fall within the definition of an international transaction as per Section 92B of the Act. Therefore, no transfer pricing adjustment was warranted.