Case Law Details

Case Name : Kodak India Pvt. Ltd Vs. Addl. Commissioner of Income Tax (ITAT Mumbai)
Appeal Number : , ITA No. 7349/Mum/2012
Date of Judgement/Order : , 30-04-2013
Related Assessment Year :
Courts : All ITAT (5383) ITAT Mumbai (1672)

Kodak India Pvt. Ltd vs. Addl. Commissioner of Income Tax (ITAT Mumbai), ITA No. 7349/Mum/2012, Date of Pronouncement : 30-04-2013

It is undisputed that the transaction involve two domestic companies, who are individual and independent subsidiaries of their own and independent holding companies. This is also not in dispute that neither of the holding companies could be called the AE of the other contracting party. This is also not in dispute that, there is any transaction, involving a non resident company.

The case as developed by the TPO/DRP and the DR is that despite the fact that there is no foreign entity involved with an AE who is a non-resident but provisions of section 92B(2) can deem a transaction to be an international transaction and the TP provisions could consequentially be applied, has to examined by examining the definitions of:

Associated Enterprises

International Transaction

Since the entire foundation is on 92B(2), we must examine interpretation made by the DR, that the section talks of “a transaction” and not “an international transaction”, hence the expression in sub section (1) has to be read independently in sub section (2), cannot be accepted. We are dealing in Chapter X of the Income Tax Act, 1961, and the heading of the relevant provisions, which is being examined fall within the heading “Meaning of International Transaction” and even in the relevant sub section, i.e. 92B(2), prescribes, “……the transaction between such other person and the associated enterprise, … . “. In our opinion, first, there has to be an “AR”, with whom there exists an international transaction, only then it could be examined as to whether the international transaction with the “such other person” exists or not.

In the instant case there are two foreign companies and two Indian domestic companies. As admitted by both the sides the two foreign companies have independent agreement and the Indian domestic companies have independent agreement for sale of a segment of business.

Chapter X of the Income Tax Act, 1961, subscribes the computation of income from international transaction having regard to arm’s length price. Section 92(1) begins with the expression, “Any income arising from an international transaction……“. It means that Chapter X gets its jurisdiction, if there is an international transaction, between AEs. In the instant case, the transactions as entered into by the holding foreign companies and subsidiary Indian companies are independent of each other:


(FC means Foreign Company and IC means Indian Company)

It is an undisputed fact that A is AE of C and B of is AE of D. To colour the transaction as international transaction, the DR could not establish that either C had any AE relation with B or D had any AE relation with A. It also seems that the TPO/AO did not peruse the contract entered into by the holding companies, wherein the effects of the transaction on its subsidiaries had been recited.

We cannot accept the arguments of the TPO/DR to disregard the legal character of the assessee and the other enterprise, due to the influence of the agreement between foreign holding companies, because when we examine the instant case in the light of the decision of Vodafone International Holdings BV vs UOI, reported in 341 ITR 1 (SC), we find the ratio decidendi emerging is, if there are two separate but related entities, their separate legal character cannot be disregarded under normal circumstances. This can only be done where the revenue positively proves the factum of influence of foreign AE over the affairs of the domestic entity. We also find, as an undisputed fact by the revenue authorities that the funds received as sale consideration were entirely received by the assessee company. This fact, though extracted by the TPO in his order, has not been rebutted by him, along with other clauses of APA (as reproduced in pre paras). If we proceed on the presumption, as founded by the AO/TPO/DR that the instant transaction had a positive economic behavior by the foreign holding companies and therefore, the instant transaction should be held to be bad and sham (as the TPO talks about lifting the corporate veil), then, in that case, the instant transaction could never have taken place. In that scenario, the global transaction shall only survive, without any tax implications under domestic laws.

When we read the deeming provision of section 92B(2), we cannot slip out of the definition of international transaction, that too, when the deeming provision, itself says, “for the purposes of sub section (1)”. As observed by their Lordships, in the case of K.P. Varghese (supra), “the Parliament would have enacted that provision as a separate section and not pitchforked it into section 52 with a total stranger under an appropriate marginal note”. The similar course could have been adopted by the legislature to place section 92B(2), independently, not under the heading of international transaction. Another important observation has to be made in this context is that the legislatures committed the deeming provision alongside section 92B(1) by using the expression, “for the purposes of sub-section (1)”.

To come within the purview of section 92(1), 92A(1) the transaction must go through the needle hole definition provided in section 92B(1). This, transaction, cannot be presumed to be international transaction, even when the revenue authorities have tried to include it as the deemed transactions, as the case made out by the TPO/AO in the instant case.

In these circumstances, we hold that there was no international element involved in the sale of imaging segment by the assessee of its business to Carestream Health Ltd. and hold it was a purely a domestic transaction.

AO can invoke Rule 8D only when he records satisfaction in regard to the correctness of the claim of the assessee

In our opinion, Rule 8D is not automatic, it is for the AO to examine, at the outset, the correctness of the claim of the assessee, whether he has incurred any expenditure or not and has to give a definite finding, as to how the claim of the assessee is unacceptable. If, on examination, it is found that such expenditure is lower than the disallowance, as computed under Rule 8D, then actual expenditure, as estimated by the AO would have to be disallowed. If, on the other hand, the assessee is able to substantiate on facts, that the exempt income does not bear any cost/expenditure, in such cases, disallowance under section 14A, may become invalid.

As observed above, Rule 8D cannot be invoked directly and mechanically, i.e., without giving a detailed and speaking reasons. Bald statement, made by the AO that he has referred to the accounts, does not give him an automatic jurisdiction to invoke the provisions of section 14A read with Rule 8D. Disallowance, made on such basis is not permissible. In order to give quietus to the impugned issue, where no expenditure has been attributed to wards the exempt income by the assessee, we, restore the issue of disallowance to the AO for computing the disallowance in accordance with the provisions of section 14A(2), if at all, by giving detailed reasoning and speaking order, needless to say that the AO shall give adequate and reasonable opportunity to the assessee to present its case.

In these circumstances, we set aside the order of the DRP and direct the AO to compute the disallowance in accordance with the provisions of section 14A(2), as per our observations in the above para.

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