Transfer pricing applies to partner-to-firm interest transfers despite capital gains deeming rules and treaty non-discrimination claims.

A proposed Canadian partnership was treated as potentially assessable as a firm if the deed satisfied section 184, with partners' shares excluded from their individual total income; residence remained a factual question based on control and management. The transfer of participating interest to the partnership was held to be an international transaction between associated enterprises, so transfer pricing principles governed arm's length computation rather than the book-value deeming rule in section 45(3) alone. Article 24 of the India-Canada DTAA did not bar application of transfer pricing provisions, as the non-discrimination clause did not exempt cross-border associated-enterprise transactions from arm's length taxation.

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Issues: (i) whether the proposed application was hit by the threshold bar of prima facie tax avoidance; (ii) whether the proposed Canadian partnership could be assessed as a firm, its tax rate and residential status, and whether the partners' share of profit would be exempt; (iii) whether transfer of participating interest to the partnership would fall under the special capital gains rule or the transfer pricing provisions; and (iv) whether Article 24 of the India-Canada DTAA barred application of transfer pricing provisions.

Issue (i): whether the proposed application was hit by the threshold bar of prima facie tax avoidance;

Analysis: The threshold bar under section 245R(2) applies only where the transaction, on the face of it, is designed to avoid income-tax. The restructuring was explained as a commercially motivated separation of the Amguri block to attract investment, and no material showed that the proposal was a camouflage or that the present arrangement itself was engineered primarily to avoid tax.

Conclusion: The application was not rejected on the ground of prima facie tax avoidance.

Issue (ii): whether the proposed Canadian partnership could be assessed as a firm, its tax rate and residential status, and whether the partners' share of profit would be exempt;

Analysis: A partnership may be assessed as a firm if the partnership is evidenced by an instrument and the individual shares are specified in that instrument, and the deed could be read as sufficiently specifying the partners' shares. Residential status depends on the actual location of control and management and could not be conclusively determined on the draft arrangement alone. Once assessed as a firm, the applicable rate for a firm is uniform, and the partners' share in the firm's total income is excluded from their own total income.

Conclusion: The proposed entity could be assessed as a firm if section 184 is complied with, the residence question was left to factual determination, the firm was liable to tax at the applicable firm rate, and the partners' share of profit was exempt in their hands.

Issue (iii): whether transfer of participating interest to the partnership would fall under the special capital gains rule or the transfer pricing provisions;

Analysis: Section 45(3) deems the book value recorded in the firm's accounts to be the full value of consideration for transfers by a partner to a firm, but Chapter X applies to international transactions between associated enterprises and is directed at arm's length computation. The two provisions were harmonised by treating international transactions as governed by transfer pricing principles, even where the transfer otherwise answers the description in section 45(3).

Conclusion: The transfer was held to be an international transaction between associated enterprises and capital gains were to be computed under the transfer pricing provisions, not merely by the book-value deeming rule.

Issue (iv): whether Article 24 of the India-Canada DTAA barred application of transfer pricing provisions;

Analysis: Article 24 prohibits discrimination between nationals in similar circumstances, while the transfer pricing regime turns on residential status and the nature of cross-border associated-enterprise transactions. The provision does not exempt such transactions from arm's length taxation merely because one participant is a foreign national or non-resident.

Conclusion: Article 24 did not assist the applicant and did not preclude application of the transfer pricing provisions.

Final Conclusion: The ruling accepted the partnership's assessability in principle and the exclusion of partners' shares from their individual incomes, but it upheld application of transfer pricing to the transfer of participating interest and rejected the treaty-based discrimination challenge.

Ratio Decidendi: A transaction may fall within a specific deeming rule for capital gains and yet still be governed by transfer pricing provisions where it is an international transaction between associated enterprises, and a non-discrimination treaty clause does not prevent such application unless comparable domestic and foreign nationals are subjected to different taxation in the same circumstances.

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