Permanent Establishment Is A Separate Entity For The Purpose Of Transfer Pricing – ITAT Hyd

Author:Mr Karthik Ranganathan
Profession:Karthik Ranganathan
 
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The Income Tax Appellate Tribunal (ITAT), Hyderabad Bench has recently held in the case of DCIT, Hyderabad vs. M/s IJM (India) Infrastructure Ltd, Hyderabad (2014-TII-114-ITAT-HYD-TP) that a permanent establishment (PE) of a foreign company has to be treated as separate entity for the purpose of transfer pricing and that any transaction entered by an Indian resident i.e. a company with such a PE should not be treated as an international transaction. Which means, such a transaction should be treated as a domestic transaction and not as an international transaction under section 92B of the Income-tax Act, 1961 (the Act). One of the main reasons for the ITAT to arrive at such a conclusion is for the fact that there is no Indian base erosion in such a transaction. In the sense, the transaction between the parties is tax neutral and even if the payments between such a PE and the Indian company is not at arm's length price (ALP), it will still not erode tax base in India as it gets neutralized in one taxpayer's hand or the other. The ITAT seems to have given little importance to the fact that a PE is subject to tax at 40% (base rate) and whereas a domestic company is taxed only at 30% (base rate).

The above holding of the ITAT also finds support from the definition of 'enterprise' in section 92F of the Act which includes a PE. Which simply means, a PE can be a standalone enterprise/ separate entity.

However, by this ruling one aspect seems to have become a dead letter law. In section 92B(1) of the Act, international transaction means a transaction between two or more associated enterprises (AE), either or both of whom are non-residents. The analysis of which is dealt in detail in the concluding remarks of this KS Alert with examples. Meanwhile, the brief facts of the case and the arguments of the parties are as under.

Facts of the case

The taxpayer, IJM (India) Infrastructure Ltd, Hyderabad (IJM India) is engaged in the business of works contract, construction and maintenance of roads, bridges, townships, buildings, etc. and is a 99% subsidiary of IJMII Mauritius (IJM Mauritius). IJM Mauritius is a wholly owned subsidiary of IJM Corporation Berhad, Malaysia (IJM Malaysia). IJM Malaysia has an MCD Project Office (PO) in New Delhi, India. This PO is admittedly a PE of IJM Malaysia in India. The various construction projects that were secured by IJM Malaysia and the PE in India were subcontracted to the taxpayer by way of back to back arrangement with a thin margin...

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