Business transfer between domestic associated enterprises and applicability of transfer pricing deeming under section 92B(2) rejected, appeal allowed

Construction of the transfer pricing deeming provision: where a business transfer occurs between two resident associated enterprises, the statutory prerequisite for treating it as a transaction with a person other than an associated enterprise is not satisfied, so the deeming provision cannot apply; consequence: the transaction cannot be characterised as an international transaction. The invocation of substance over form to treat a domestic associated enterprise as effectively a non-AE for deeming purposes is rejected as incompatible with the statutory gateway; consequence: transfer pricing adjustment under the deeming clause is inapplicable and the appeal succeeds.

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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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