Tax Dispute on International Transaction Dismissed: Court Upholds Tribunal’s Decision

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Case Name:

Commissioner of Income Tax Vs Kodak India Pvt. Ltd. (High Court of Bombay)

Income Tax Appeal No. 15 of 2014

Date: 11th July 2016

Key Takeaways:

1. The court didn’t overturn the Tribunal’s interpretation of Section 92B(2) (of Income Tax Act, 1961).
2. Even if a transaction is between two domestic companies, it might be considered an international transaction under certain circumstances.
3. The method used to determine the Arm’s Length Price (ALP) must be one prescribed by law.
4. The court left the legal issues open for future consideration in more appropriate cases.

Issue:

The main question here was: Should the sale of a business between two Indian companies be considered an international transaction under Section 92B(2) (of Income Tax Act, 1961) when their foreign parent companies had a prior global agreement?

Facts:

1. Kodak India Pvt. Ltd. (our respondent) is a subsidiary of Eastman Kodak Co. USA.
2. Kodak India sold its imaging business to Carestream Health India Pvt. Ltd.
3. Carestream Health India is a subsidiary of Carestream Inc., a USA company.
4. The parent companies (Eastman Kodak and Carestream Inc.) had a global agreement for the sale of the business.
5. This all happened during the assessment year 2007-08.

Arguments:

The tax department (our appellant) argued:

• The sale should be treated as an international transaction under Section 92B(2) (of Income Tax Act, 1961).
• The global agreement between the parent companies makes this a deemed international transaction.

Kodak India (our respondent) argued:

• This was just a transaction between two domestic, non-associated companies.
• The provisions of Chapter X of the Income Tax Act (which deals with transfer pricing) shouldn’t apply.

Key Legal Precedents:

Interestingly, the judgment doesn’t mention any specific legal precedents. Instead, it focuses on the interpretation of Section 92B(2) (of Income Tax Act, 1961), as it stood during the assessment year 2007-08.

Judgement:

The court dismissed the tax department’s appeal. Here’s why:

1. The Tribunal had already found that the transaction terms were independently decided by the Indian companies, not controlled by the global agreement.
2. The Tribunal also found that the Arm’s Length Price (ALP) determined by Kodak India was reasonable.
3. The method used by the Transfer Pricing Officer to determine ALP wasn’t one of the prescribed methods under Section 92C (of Income Tax Act, 1961).
4. The court felt that even if they ruled in favor of the tax department on the legal interpretation, it wouldn’t change the outcome given these factual findings.

FAQs:

Q: What’s an “international transaction” in this context?

A: It’s a transaction that involves companies from different countries, or sometimes, as argued here, transactions between domestic companies that might be influenced by their foreign parent companies.

Q: What’s an “Arm’s Length Price”?

A: It’s the price that would be charged between unrelated parties for the same transaction. It’s used to ensure that related companies aren’t manipulating prices for tax benefits.

Q: Why didn’t the court decide on the interpretation of Section 92B(2) (of Income Tax Act, 1961)?

A: The court felt that given the factual findings of the Tribunal, the legal interpretation wouldn’t change the outcome in this specific case.

Q: Does this mean all transactions between Indian subsidiaries of foreign companies are international transactions?

A: Not necessarily. The court left this question open for future cases to decide.

Q: What’s the takeaway for companies in similar situations?

A: It’s crucial to ensure that transactions are independently negotiated and that any transfer pricing calculations use methods prescribed by law.

1. This Appeal under Section 260 (of Income Tax Act, 1961)­A of the Income Tax Act, 1961 (the Act) challenges the order dated 30th April, 2013 passed by the Income Tax Appellate Tribunal (the Tribunal). The impugned order is in respect of Assessment Year 2007­-08.

2. Being aggrieved by the impugned order of the Tribunal, the Revenue has preferred the present appeal raising the following two questions for our consideration :­

(a) Whether on the facts and in the circumstances of the case and in law, the Tribunal was in error in not appreciating the fact that the provisions of Section 92B(2) (of Income Tax Act, 1961) are applicable to the sale transaction between the two domestic companies since the provisions of sub­section (1) and sub­section (2) are independent of each other ?

(b) Whether on the facts and in the circumstances of the case and in law, the Tribunal failed to appreciate that the sale of the imaging business from the Assessee to the Associated Enterprise of a foreign company in India was not the normal 'International Transaction' falling within the precincts of Section 92B(1) (of Income Tax Act, 1961); but was a transaction within the precincts of Section 92B(2) (of Income Tax Act, 1961), being a transaction between unrelated parties, where there exists a prior agreement between the Associate Enterprises and such unrelated party in relation to a relevant transaction OR the terms of the relevant transaction are determined in substance between such other person and the Associated Enterprise, thus qualifying to be a deemed International Transaction ?

3. The respondent assessee is an Indian subsidiary of M/s. Eastman Kodak Co. USA (EKC). During the previous year relevant to the assessment year the respondent assessee sold its imaging business to one M/s. Carestream Health India Pvt. Ltd. The buyer company i.e. M/s. Carestream Health India Pvt. Ltd. was a Indian subsidiary of M/s. Carestream Inc. an USA company. The case of the respondent assessee was that the transaction of sale of imaging business by the respondent assessee to M/s. Carestream Health India Pvt. Ltd. was a transaction between the two domestic non Associated Enterprises. Hence, the provision of Chapter X of the Act would have no application. Thus, had not even declared this transaction in its 3 CEB report.

4. However the Transfer Pricing Officer (TPO) while examining another Transfer Pricing issue came across the impugned transaction. It held on the basis of Section 92B(2) (of Income Tax Act, 1961) that even if the transaction between Kodak India Pvt. Ltd. and M/s. Carestream Health India Pvt. Ltd. was between two domestic non Associated Enterprises, yet it would still be considered to be an International Transaction and Chapter X of the Act would be applicable. This on the basis that the holding companies of both the respondent assessee as well as M/s. Carestream Health India Pvt. Ltd. had entered into a global agreement for sale of its business. This global agreement was prior in point of time to the sale of imaging business by the respondent assessee to M/s. Carestream Health India Pvt. Ltd. The Assessing Officer passed a draft Assessment Order under Section 144C (of Income Tax Act, 1961) on the basis of the order of the TPO.

5. Being aggrieved, the respondent assessee approached the Dispute Resolution Panel (DRP). However, the view of the TPO was upheld by the DRP.

6. On appeal, the Tribunal on interpretation of Section 92B(2) (of Income Tax Act, 1961), as in force during the subject assessment year concluded that the transaction would not be covered by the definition of International Transaction. This inter alia on the ground that the prior to amendment to Section 92B(2) (of Income Tax Act, 1961) w.e.f. 1st April, 2015 such a transaction was not deemed to be an International Transaction. Further, the impugned order also examined the issue on facts and held that even if the Revenue's interpretation is accepted, no addition on account of Arms Length Price (ALP) is warranted. Moreover, it also held that the ALP was sought to be determined by a method not prescribed under Section 92C (of Income Tax Act, 1961) and the prayer for restoration to the TPO to apply the prescribed method was rejected.

7. The grievance of the Revenue as evident from the question formulated is only in respect of interpretation of Section 92B (of Income Tax Act, 1961).

On the interpretation put on it by the Revenue, the impugned transaction would be covered by Chapter X of the Act.

8. The Revenue has not raised any grievance to the finding in the impugned order of the Tribunal, that even if one proceeds on the basis of theory of prior agreement, as provided in Sub­Section 2 (of Income Tax Act, 1961) of Section 92B (of Income Tax Act, 1961), yet the entire exercise of transfer of imaging business done by the Kodak India Pvt. Ltd. to M/s. Carestream Health India Pvt. Ltd. was independently done on its own terms and conditions. The global agreement arrived at between its holding companies did not in any manner control the terms arrived at between the Kodak India Pvt. Ltd. and M/s. Carestream Health India Pvt. Ltd. The aforesaid finding is not disputed by the Revenue before us.

9. Further, we find that the impugned order of the Tribunal rendered a finding of fact that the ALP for transfer of its imaging business as determined by the respondent assessee was reasonable is also not disputed. The impugned order notes that average gross profit was Rs.4.49 crores and respondent assessee had worked out gross profit at Rs.5.98 crores to work out the consideration receivable. Thus, quite reasonable. This finding of fact has also not been challenged by the Revenue.

10. We must also record the fact that the ALP was arrived at by the Transfer Pricing Officer (TPO) by not adopting any of the methods prescribed under Section 92C (of Income Tax Act, 1961). The method to determine the ALP adopted was not one of the prescribed methods for computing the ALP. It was not even any method prescribed by the Board. At the relevant time, i.e. for A.Y. 2008­09 Section 92C (of Income Tax Act, 1961) did not provide for other method as provided in Section 92C(1)(f) (of Income Tax Act, 1961). The impugned order of the Tribunal holds that the method adopted by the Revenue to determine the ALP was alien to the methods prescribed under Section 92C (of Income Tax Act, 1961). In the above circumstances, the Tribunal declined to restore the issue to the Assessing Officer for re­determining the ALP by adopting one of the methods as listed out in Section 92C (of Income Tax Act, 1961). This finding of the Tribunal has also not been challenged by the Revenue.

11. In view of the fact that the Revenue has accepted the order of the Tribunal on its finding on facts on the two issues as pointed out hereinabove as well as the refusal of the Tribunal to restore the issue of determination of ALP to the TPO by following one of the methods prescribed under Section 92C (of Income Tax Act, 1961). Thus, the questions as formulated for our consideration even if answered in favour of the Revenue would become academic in the present facts. Thus, we see no reason to entertain this appeal. However, we make it clear that the issues of law which has been raised in the present appeal are left open for consideration in an appropriate case.

12. In view of the above, the questions as formulated in the peculiar facts and circumstances of the case, would make the entire exercise academic. Therefore, the questions as proposed do not give rise to any substantial question of law. Thus, not entertained.

The appeal is dismissed. No order as to costs.

(A.K. MENON, J.) (M.S. SANKLECHA, J.)