In a decision that will have farreaching implications on companies across sectors, the Income-Tax Appellate Tribunal (ITAT), Mumbai, held that an element of cross-border transaction and existence of an associated enterprise (AE) are pre-requisites for invoking the provisions of transfer pricing rules. On April 30, ITAT ruled that at least one of the parties should be a non-resident.

Transfer pricing rules were introduced in India in 2001 to check possible losses to the government from cross-border transactions with related parties since many multinational companies shifted profits to tax-friendly destinations to pay lower tax here.

In this instance, the buyer and seller are the Indian subsidiaries of US-based multinationals. The taxpayer,Kodak India, argued that a transaction between two companies based in India does not attract the provisions of transfer pricing rules. These provisions kick in only if there's an element of cross-border transaction with an associated enterprise, a view that the transfer pricing officer differed with.

The genesis of the tax dispute was in the agreement between Eastman Kodak USA and Onex — rechristened Carestream USA â€” for the worldwide sale of Eastman's medical business to Carestream. Following this, the Indian subsidiary of Eastman Kodak, Kodak India, the taxpayer company, sold its Indian business to the Indian subsidiary of Carestream USA for $13.54 million.

The transfer pricing officer held that the transactions between the Indian companies are related to their respective AEs because these deals involved a global transaction agreed upon between the US-based AEs. The tribunal observed that though there was a pact between the US-based holding companies of the Indian subsidiaries, the holding companies had not dictated the terms of sale to their Indian subsidiaries.

The Indian companies — the buyer and the seller — had decided the terms of sale between themselves independently, and therefore it cannot be construed that the transaction had a connection with their respective AEs. (Economic Times)