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of <h1>Business transfer between domestic associated enterprises and applicability of transfer pricing deeming under section 92B(2) rejected, appeal allowed</h1> Construction of the transfer pricing deeming provision: where a business transfer occurs between two resident associated enterprises, the statutory ... International transaction - TP Adjustment - correct construction and application of section 92B(1) and 92B(2) - substance over form - whether the business transfer/divestment of India’s support services business by the assessee (a resident company) to Lionheart (also a resident company), both being domestic associated enterprises, can at all be brought within Chapter X by treating it as an “international transaction”, including as a “deemed international transaction” u/s 92B(2)? - HELD THAT:- In the present case, it is not even the Revenue’s case that the assessee entered into the Business Transfer Agreement with a third party (a “person other than an associated enterprise”). On the contrary, the DRP itself proceeds on the footing that the assessee and Lionheart are AEs, and the transaction is the divestment by the assessee to Lionheart. Once the transaction is between two AEs, the statutory gateway of section 92B(2) is not crossed, as held in Reach Data [2019 (10) TMI 1547 - ITAT MUMBAI]. DRP holds that because of the group reorganization and the alleged prior agreement involving non-resident group entities, “Lionheart [is] effectively a “person other than an AE” in substance for 92B(2) purposes ”, and it invokes “substance over form”. DRP states that Reach Data is distinguishable because there was “no evidence of prior non-resident AE influence” in that case. This distinction does not hold in law, because the decisive ratio in Reach Data is not founded on absence or presence of influence. It rests on the statutory prerequisite that section 92B(2) “presupposes a transaction… with a person other than an associated enterprise” and that where the transaction is “between two AEs”, the prerequisite is not satisfied. Hence, the DRP”s attempt to keep Reach Data out on facts does not address the governing legal test. For the aforesaid reasons, section 92B(2) has no application to the present transaction. Consequently, the transaction between the assessee and Lionheart, being a transaction between two resident associated enterprises, cannot be deemed to be an international transaction. Appeal filed by the assessee is allowed. Issues: Whether the business transfer/divestment between two Indian resident associated enterprises can be treated as an 'international transaction' under section 92B(1) or as a 'deemed international transaction' under section 92B(2) for the purposes of Chapter X of the Income-tax Act, 1961.Analysis: Section 92B(1) defines an 'international transaction' as one between two or more associated enterprises, either or both of whom are non-residents; thus the statutory requirement is that at least one contracting party be a non-resident. Section 92B(2) is a deeming provision that applies only where an enterprise transacts with a person other than an associated enterprise and there exists a prior agreement or arrangement with a non-resident AE; its trigger is a transaction with a third party (a person other than an AE). Where the contract is expressly between two resident AEs, the preconditions of both section 92B(1) and section 92B(2) are not satisfied. Coordinate Tribunal decisions (MWH India; Reach Data) establish that common foreign control or group-level strategy cannot, by itself, convert a domestic AE-to-AE transaction into an international or deemed international transaction absent the statutory conditions. Reporting in Form 3CEB or qualifying remarks cannot expand the statutory definition or supply the missing jurisdictional element. Because the jurisdictional foundation for Chapter X is absent, consequential issues regarding reference to the TPO, adoption of valuation methods, Rule 11UAE, and penalty initiation become academic.Conclusion: The transaction between the assessee and the transferee, both Indian resident associated enterprises, is not an 'international transaction' under section 92B(1) and cannot be deemed an international transaction under section 92B(2); the transfer pricing adjustment of Rs. 46,45,00,000 is without jurisdiction and is deleted, resulting in the appeal being allowed in favour of the assessee.
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