In a recent ruling in
the case of Vijai Electricals Ltd. (“Taxpayer”), the Hyderabad Bench of
the Income-tax Appellate Tribunal (“Tribunal”), has held that an investment made
in a foreign subsidiary is not an international transaction within the meaning
of section 92B of the Income-tax Act, 1961 (“Act”) and accordingly, transfer
pricing provisions are not applicable.
Brief facts of
Taxpayer’s case:
·
The Taxpayer had
invested certain amounts in share capital of its overseas subsidiaries during
the previous year relevant to Assessment Year (“AY”) 2007-08. The Taxpayer had
not filed any report in Form 3CEB with the tax return. The regular assessment
under section 143(3) of the Act for that year had been completed by the
Assessing Officer (“AO”).
·
The Commissioner of
Income-tax (“CIT”) noted that, during the relevant year, the Taxpayer had
invested around Rs 21 crores in its three subsidiaries situated outside India.
The CIT held that the transaction of investing in foreign subsidiaries was an
international transaction under Section 92B of the Act, and since the AO had
completed the assessment without examining/ referring these transactions to
Transfer Pricing Officer (“TPO”), the order was erroneous and prejudicial to the
interests of the Revenue. Therefore, invoking his powers for revision under
section 263 of the Act, the CIT set aside the assessment order and directed the
AO to do a fresh assessment, after referring the transactions to the TPO for
determining the arm’s length price (“ALP”).
·
Aggrieved, the
Taxpayer filed an appeal with the Tribunal against the order passed by the CIT
under section 263 of the Act.
Taxpayer’s key
contentions:
·
The capital investment
made in a foreign subsidiary is not an international transaction as per section
92B of the Act and, thus, there was no requirement of filing a report in Form
3CEB.
·
The transaction was
not one of sale involving computation of income and giving rise to an
international transaction contemplated under Chapter X of the
Act.
·
Transfer pricing
provisions are applicable only when there is income chargeable to tax arising
from the transaction, which was not the case for the Taxpayer.
·
Reliance was placed on
Circular No. 14 dated November 22, 2001 and rulings of the Authority for Advance
Rulings (“AAR”) in the case of Dana Corporation, In Re [321 ITR 178 (AAR)] and
Amiantit International Holding Ltd, In Re [322 ITR 678
(AAR)].
Revenue’s
contentions:
·
The main contention of
the Department before the Tribunal was that the assessment order passed by the
AO was erroneous and capable of being revised under Section 263 of the Act, as
the AO had failed to examine and consider the factual and legal aspects of the
case.
·
Decision of the
Tribunal:
The Tribunal, ruling
in favour of the Taxpayer, set aside the order of the CIT and held as
under:
·
there is no income
element in transactions involving investment in the share capital of a foreign
subsidiary;
·
the transaction of
investment in share capital of a foreign subsidiary is not in the nature of an
international transaction referred to section 92B of the Act;
and
·
transfer pricing
provisions are not attracted in the absence of income.
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