Tax Tribunal Ruling: Transfer Pricing and Associated Enterprises Clarified

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Case Name:

Principal Commissioner of Income Tax and Anr. Vs M/s. Page Industries Ltd. (High Court of Karnataka)

ITA No. 285 of 2017

Date: 8th January 2021

Key Takeaways:

• The court clarified the interpretation of “associated enterprises” under Section 92A of the Income Tax Act.
• It emphasized that sub-sections (1) and (2) of Section 92A must be read together.
• The ruling impacts how transfer pricing adjustments are determined for tax purposes.

Issue

Is the transaction between M/s. Page Industries Ltd. and Jockey International Inc. an international transaction under Section 92A of the Income Tax Act, 1961?

Facts

M/s. Page Industries Ltd., a company engaged in manufacturing and selling ready-made garments, is a licensee of the Jockey brand. The company paid royalties to Jockey International Inc. and reported these as international transactions. The Assessing Officer and Transfer Pricing Officer questioned the arm’s length nature of these transactions, leading to a transfer pricing adjustment. The case was taken to the Income Tax Appellate Tribunal, which ruled in favor of the assessee, prompting the revenue to appeal.

Arguments

• Revenue’s Argument: The transactions should be treated as international transactions under Section 92A(2)(g) because the business of M/s. Page Industries Ltd. is dependent on the use of Jockey’s trademarks and licenses.
• Assessee’s Argument: The provisions of Section 92A(1) and (2) should be read together, and the criteria for being associated enterprises were not met.

Key Legal Precedents

• The court referred to the memorandum of the Finance Bill, 2002, which clarified the interpretation of associated enterprises.
• The judgment cited the case of “PRL. COMMISSIONER OF INCOME TAX-CENTRAL Vs. VEER GEMS” where it was held that sub-sections (1) and (2) of Section 92A must be read together.

Judgement

The court ruled in favor of M/s. Page Industries Ltd., stating that the transactions did not qualify as international transactions under Section 92A. The court emphasized that both sub-sections (1) and (2) of Section 92A must be read together, and the criteria for associated enterprises were not met. The appeal by the revenue was dismissed.

FAQs

Q1: What does this ruling mean for M/s. Page Industries Ltd.?

A1: The ruling means that the transactions in question are not considered international transactions, which affects how they are taxed.

Q2: How does this case impact other companies?

A2: It clarifies the interpretation of associated enterprises under Section 92A, which could influence how other companies report and justify their international transactions.

Q3: Why did the court emphasize reading sub-sections (1) and (2) together?

A3: The court believed that reading them independently could render one of the provisions ineffective, which is not permissible under statutory interpretation rules.

This appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for short) has been filed by the revenue. The subject matter of the appeal pertains to the Assessment Year 2010-11. The appeal was admitted by a Bench of this Court vide order dated 09.11.2018 on the following substantial question of law:

"Whether on the facts and in the circumstance of the case, the Tribunal is right in law in setting aside the disallowance made by appellate authority under Section 80JJA of the Act by relying on its earlier order in case of

assessee itself when said earlier order has not reached finality and even when the appellate authority rightly rejected said claim as deduction cannot be given in respect of additional wages paid on employment of new workmen during the previous year 2009-10 (Rs.55,99,,873/-) & 2008-09 (Rs.18,09,043/-) as Form No.10DA certifies the amount if deduction at Rs.1,11,32,662/- for the Assessment Year 2010-11?"

3. Facts leading to filing of this appeal briefly stated are that the assessee is a company incorporated under the provisions of the Companies Act, 1956 and is engaged in the business of manufacture and sale of ready made garments.

The assessee - company is a licensee of the brand name

'Jockey' for the exclusive and marketing of Jockey

readymade garments under license agreement with Jockey

International Inc, a company incorporated in United States of

America which is the owner of brand Jockey. In order to

collect the brand name, the assessee paid consideration in

the form of royalty at the rate of 5% of the sales. The

assessee filed return of income for the Assessment Year

2010-11 on 05.10.2005 and declared the total income of

Rs.55,25,65,514/-. The Assessing Officer, by an order dated

03.02.2014, processed the return. Thereafter, the case of

the assessee was taken up for scrutiny and notice under

Section 143(2) of the Act was issued. The Assessing Officer,

during the course of the proceedings, found that the

assessee - Company had returned the international

transaction in Form 3CEB and paid royalty of

Rs.6,78,29,024/- to JII. The assessee sought to justify the

consideration paid to international transactions entered with

JII to be at arm's length.

4. The Assessing Officer thereafter referred the matter

to the Transfer Pricing Officer, who by an order dated

30.01.2014 inter alia computed the transfer pricing

adjustment at Rs.20,20,07,861/- under Section 92CA(3) of

the Act. The Transfer Pricing Officer treated the expenditure

incurred on the advertisement and marketing and product

promotion as an international transaction and determined the

arms length price by applying bright line method. Pursuant

to the order passed by the Transfer Pricing Officer, a draft

assessment order was passed by the Assessing Officer, by

which disallowance to the extent of adjustment on account of

transfer pricing Rs.20,20,07,861/-, disallowance under

Section 14A read with Rule 8D(2)(iii) to the extent of

Rs.20,51,175/- and disallowance of Rs.74,08,964/- under the

provisions of Section 80JJAA of the Act were proposed. The

assessee thereupon filed objections before the Dispute

Resolution Panel contesting all the additions. The Dispute

Resolution Panel, however rejected the objections preferred

by the assessee. The assessee thereupon filed an appeal

before the Income Tax Appellate Tribunal (hereinafter

referred to as 'the Tribunal' for short). The Tribunal, by an

order dated 24.06.2016, inter alia held that since the

requirements laid down in Section 92A(1) has not been

fulfilled, therefore, the provisions of Section 92A are not

attracted to the fact situation of the case. To the aforesaid

extent, the appeal preferred by the assessee was allowed. In

the aforesaid factual background, the revenue has filed this

appeal.

5. Learned counsel for the revenue submitted that the

transactions entered into by the assessee have to be treated

as an international transaction. In this connection, our

attention has been invited to paragraph 3.1.3 and paragraph

3.1.4 of the order passed by the Transfer Pricing Officer. It

was further submitted that the order passed by the Transfer

Pricing Officer has been affirmed by the Dispute Resolution

Panel. However, the Tribunal has partly allowed the appeal

preferred by the assessee merely on the ground that the

assessee cannot be said to be an associated enterprise and

therefore, the requirements of Section 92A(1) have not been

complied with. Therefore, the provisions of Section 92A are

not applicable to the transaction in question and therefore,

the same cannot be treated to be an international

transaction. It is further submitted that the provisions of

Section 92A(1) and (2) have to be read independently and

since the case of the assessee falls within the purview of

Section 92A(2)(g) of the Act, therefore, the transaction in

question has to be held as an international transaction and

therefore, the Tribunal ought to have held that the provisions

of Section 92A are applicable to the case of the assessee.

6. On the other hand, learned counsel for the assessee

has invited our attention to the memorandum of the Finance

Bill, 2002, in which clarification regarding provisions of

transfer pricing has been mentioned. It is further submitted

that the Tribunal has relied on the judgment of Ahmedabad

Bench of the Tribunal, which had held that sub-Sections 1

and 2 of Section 92A have to be read together and the

aforesaid order passed by the Tribunal has been upheld by

Gujarat High Court in 'PRL. COMMISSIONER OF INCOME

TAX-CENTRAL Vs. VEER GEMS' (2017) 249 TAXMAN

264 (GUJ). Against the decision of Gujarat High Court,

special leave petition was preferred by the revenue which

was dismissed in 'PRL. COMMISSIONER OF INCOME TAX-

CENTRAL Vs. VEER GEMS' (2018) 256 TAXMAN 298

(SC). Therefore, both the provisions namely sub-Sections

(1) and (2) have to be read together. It is also pointed out

from the order passed by the Dispute Resolution Panel that

the panel itself has recorded a finding that the Transfer

Pricing Officer has gone into the provision of Section 92A(2)

of the Act. It is further submitted that the provisions of sub-

Sections (1) and (2) of Section 92A are interlinked and have

been read together harmoniously and therefore, the

substantial question of law framed in this appeal is required

to be answered in favour of the assessee.

7. We have considered the submissions made on both

sides and have perused the record. From perusal of the

Memorandum of Finance Bill, 2002, it is evident that sub-

Section (2) of Section 92A was amended with effect from

01.04.2002 to clarify that mere fact of participation by one

enterprise in the management or control or capital of the

other enterprise, or the participation of one or more persons

in the management or control or capital of both the

enterprises shall not make them associated enterprises,

unless the criteria specified in sub-Section (2) are fulfilled.

8. Before proceeding further, it is apposite to take note

of relevant extract of sub-Sections (1) and (2) of Section 92A

of the Act which reads as under:

92A (1) For the purposes of this section and

sections 92, 92B, 92C, 92D, 92E and 92F,

"associated enterprise", in relation to another

enterprise, means an enterprise -

(a) which participates, directly or indirectly,

or through one or more intermediaries, in

the management or control or capital of the

other enterprise; or

(b) in respect of which one or more persons

who participate, directly or indirectly, or

through one ore more intermediaries, in its

management or control or capital, are the

same persons who participate, directly or

indirectly, or through one or more

intermediaries, in the management or

control or capital of the other enterprise.

(2) For the purposes of sub-section (1), two

enterprises shall be deemed to be associated

enterprises if, at any time during the previous year

(g) the manufacture or processing of goods

or articles or business carried out by one

enterprise is wholly dependent on the use of

know-how, patents, copyrights, trade-

marks, licences, franchises or any other

business or commercial rights of similar

nature, or any data, documentation,

drawing or specification relating to any

patent, invention, model, design, secret

formula or process, of which the other

enterprise is the owner or in respect of

which the other enterprise has exclusive

rights; or"

9. Thus, from perusal of the aforesaid provisions, it is

evident that sub-Sections (1) and (2) of Section 92A of the

Act are interlinked and have to be read together. In case the

provisions of sub-Sections (1) and (2) are read

independently, we are afraid that one of the provisions would

be rendered otiose which is impermissible in law in view of

the well settled rule of statutory limitation. Therefore, the

requirement contained in sub-Sections (1) and (2) of Section

92A of the Act has to be complied with. It is also pertinent to

mention here that the finding recorded by the Tribunal that

the assessee has not complied with the provisions of sub-

Section (1) of Section 92A of the Act, has not been assailed

by the revenue.

10. In view of preceding analysis, the substantial

question of law is answered against the revenue and in

favour of the assessee.

In the result, the appeal fails and is hereby dismissed.

Sd/-

JUDGE

Sd/-

JUDGE