Transfer Pricing in India

Associated Enterprise in relation to Transfer Pricing

The multinational corporations engage in multiple transactions among its entities in multiple jurisdictions. These multinational groups control the profits derived from India in a manner to manipulate the prices charged and paid in such intra-company organisations     

What is an ‘Associated Enterprise’?

Section 92A(1) of the Income Tax Act, 1961 defined the concept of Associated Enterprise. It explains the concept as two enterprises are said to be associated enterprises when one of the enterprises participates in the control or management or capital of the other enterprise either directly or indirectly or through an intermediary. This means that if one entity is participates in the management or control or capital of the other enterprise then the latter enterprise shall be considered as the associated enterprise of the participating enterprise. Further, if one or more persons within an enterprise participate in the management or control or capital and the same person or set of persons perform similar functions in the other enterprise, then also both the entities are considered as Associated Enterprises. 

Legal Framework of Associated Enterprises  

The scope of meaning of Associated Enterprise has been in contention which is given under section 92A(1) of the Income Tax Act, 1961 and section 92A(2) is considered to be merely illustrative and only expanding the scope of section 92A(1).

However, this is not the case. Section 92A(2) begins with the phrase “For the purposes of sub-section (1)”. This reflects that sub-section 92A(2) is not merely illustrative in nature but also depicts the scope of sub-section (1). This shows that sub-section is not illustrative but exhaustive.

The question that arises is whether there is a requirement of both the sub-sections in order to give meaning to the ‘associated enterprises’ or not.

An amendment was made in section 92A of Income Tax Act in the Finance Bill of 2022 wherein it was clarified that mere act of participation of one enterprise in the control or management or capital of enterprise or the act of participation of one or more persons in the control or management or capital of both the enterprises by itself does not make them an associated enterprise unless the criteria mentioned in sub-section (2) is met.

This makes the intention of the lawmakers clear with respect to meaning of Associate Enterprises that a conjoint reading of both the sub-sections (1) and (2) need to be made in order to give meaning to an associated enterprise.

Opinion of Judicial Fora on Associated Enterprises 

The Income Tax Appellate Tribunal has clarified the legal position. The basic rule regarding Associate Enterprises is set out in Section 92A(1) and this basic rule finds its application in section 92A(2).

Emphasizing on the principle that a conjoint reading of both the sub-sections under section 92A(1) and 92A(2) in order to consider an entity as associated enterprise of another enterprise, the Income Tax Appellate Tribunal (ITAT) in the case of M/s Page Industries Ltd. v DCIT held that even though the assessee satisfied the provision of 92A(2)(g), but it failed to satisfy the criteria mentioned under section 92A(1). Therefore, the ITAT ruled that the assessee cannot be treated as an Associate Enterprise.

In another case of ACIT v. Veer Gems, Ahmedabad Bench of ITAT held that the scope of section 92A(1) is governed by Section 92A(2) wherein the definition of participation in management or control or capital by one of the enterprise in the other enterprise. If the form of participation in capital or management or control is not the one envisaged under the provisions of section 92A(2), then no matter if the participation, be it de jure or de facto, is being done in the control or management or capital of the related enterprise, the court will not accept it as an associated enterprise under section 92A(1).  Therefore, both section 92A(1) and 92A(2) have to be read conjointly where section 92A(2) provides the instances participation in control of the other enterprise in order to designate an entity as an associated enterprise under section 92A(1) of the Income Tax Act.

What is the existing legal position to consider an entity as an Associated Enterprise?

A number of judgements have been discussed above explaining how an entity can be considered as an associated enterprise. Following are the principles that have been extrapolated from the above judgments:

1. The international transaction must have happened between the associated enterprises because only then can an entity invoke transfer pricing provisions and deal with determination of arm’s length price (ALP).
2. The transactions between two entities cannot be said to be transactions between associated enterprises just because transactions were done at arm’s length prices. However the opposite of this statement can be true.
3. To find the meaning of expression ‘participation in the management or control or capital’ has not been defined. It can be understood from the list of instances given under section 92A(2) which is not an illustrative list but an exhaustive list beyond which no transaction can be said to be within the meaning of ‘participation’.
4. If any form of participation in terms of management or capital or control is not covered under the list of instances provided under section 92A(2), then it will not result in the relating enterprises being considered as associated enterprises even if it results in de jure or de facto participation of the management in the control or management or capital by one of the enterprises in the other enterprises.  

Consequences

From the above discussion, it has been made clear that in order to define an associated enterprise, a conjoint reading of both the sections is required i.e. section 92A(1) and 92A(2) of the Income Tax Act, 1961^[1].Sub- Section 92A(1) defines the meaning of an Associate Enterprise, but sub-section 92A(2) lists down the instances where an entity can be considered to be an associate enterprise. If the acts of an entity do not fall under the instances listed in sub-section 92A(2), then even if the acts de jure or de facto amount to participation in the control or management or control, still the entity will not be considered as an associated enterprise.

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