Tax Tribunal Special Bench upholds applicability of transfer pricing rules to transactions between foreign enterprise and its Indian permanent establishment

 This Tax Alert summarizes a recent decision of the Special Bench (SB) of the Ahmedabad Income-tax Appellate Tribunal (ITAT), in the case of TBEA Shenyang Transformer Group Company Limited  (Taxpayer or the Head Office or HO).

The question before the SB was whether transactions between a foreign enterprise and its Indian permanent establishment (PE) can be considered an international transaction for the purpose of section 92 of the Income-tax Act, 1961 (the Act) and accordingly subject to the transfer pricing (TP) provisions of the Act. The SB ruled that a PE is a separate enterprise distinct from the HO for the purpose of the Act as well as under Article 7 of the applicable Double Taxation Avoidance Agreement (DTAA). The SB thereafter concluded that transactions between a foreign enterprise and its PE in India can be considered an international transaction and be subject to transfer pricing provisions. The SB however left the questions on whether the HO and its Indian PE are Associated Enterprises (AE) as defined in section 92A(2) of the Act and whether the transactions of the PE could be deemed international transactions under section 92B(2) of the Act for the Division Bench of the ITAT to decide based on the facts and circumstances of the case and the provisions of applicable law.