As per Section 92B (1) and sections 92, 92C, 92D, and 92E of the Income Tax Act, 1961, “international transaction” means an affair between two or more related enterprises, either or both of whom are non-residents like:
purchase, sale or lease of physical or intangible property; or
provision of services; or
borrowing or lending money, or any other transaction having a bearing on the profits, losses, income, or assets of such businesses, and
shall involve a joint agreement or arrangement between two or more associated enterprises for the allotment or apportionment of, or any contribution to, any cost or expense suffered or to be incurred in connection with a benefit, facility, or service provided or to be provided to anyone or more of such enterprises.
Analysis of international transaction The definition of an international transaction is an exhaustive one, with every transaction entered into between associated enterprises being classified as an international transaction. However, the principle condition for such AE transactions to be titled as an ‘international transaction’ is that anyhow one of the parties to the transaction should be a non-resident. Example-X Ltd. Is a Japanese company that has its subsidiary named Y Ltd. In India, Y ltd. produces industrial goods that are sold to its parent company in Japan. In this case, the selling of industrial products by Y ltd. to X ltd. is an international transaction under section 92B (1) since both company X and company Y are related parties. One of the two related parties is a non-resident.
Extension in the scope of definition through the insertion of explanation to section 92B: As per the Finance Act, 2012, the scope of the definition of international transactions has been extended with retrospective effect from April 01, 2002. As a result, various international transactions that were previously outside the scope of transfer pricing have been in the scope of Indian transfer pricing regulations by inserting an explanation to section 92B. The extended definition includes the following transactions, which are defined as international transactions:
Purchase, sale or lease of tangible or intangible property Real property means a property with a physical form, whereas abstract property means a property devoid of physical characteristics. As per Section 92B (1), transactions like purchase, sale or lease of tangible or intangible property between AEs shall be considered international transactions for transfer pricing regulations.
Provision of services The description of international transaction as specified in section 92B (1) involves the transaction of provision of services between two or more associated enterprises. Explanation to section 92B has especially magnified the width through involving provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service within the scope of ‘provision of services’ with retrospective effect from 1st April 2002.
Capital financing transactions It is usual for companies in a group to enter into financial transactions such as lending or borrowing money, providing guarantees etc. Such transactions impact the profits and losses of the enterprise; therefore, such transactions fall under the definition of international transactions. In addition, section 92B further expanded the scope of international transactions to cover a range of capital financing transactions expressly, namely guarantee, buying or selling of marketable securities, or any kind of advance, payments or deferred payment or receivable, or other debt.
Cost allocation, apportionment, or contribution In a group structure, there are usually few entities that provide support services to all the group entities. The cost incurred by such entities is reimbursed by other group entities receiving such services. The expanded definition of an international transaction includes a joint agreement or arrangement between two or more associated enterprises for the allotment or apportionment of, or any contribution to, any cost or expense suffered or to be incurred in connection with a benefit, service, facility provided or to be provided to anyone or more such enterprises.
Business restructuring or reorganization Business restructuring may include cross-border transfer of valuable intangible assets or substantial renegotiation of existing arrangements. Restructuring can be in the form of operational change (such as a change in functional, asset and risk profile of the group entities) or organizational change (such as a change in the ownership structure or administration of the group entities). Example- a merger of two group entities to form a single entity, conversion of an experienced producer into a contract manufacturer, conversion of a full-fledged distributor into a low-risk distributor, the demerger of a business segment of an enterprise with an AE etc.
Any other transaction The definition of an international transaction has been extended by adding an explanation to cover any other transaction bearing on the profits, losses, income or assets of an enterprise. Examples of such transactions could be reimbursement transactions or transactions that do not involve any charges or fees, such as free-of-cost services or goods.
Deemed international transaction In the past, associated enterprises used to interpose independent third parties in between them and transactions were routed through these unrelated parties. Such transactions remain out of transfer pricing regulations. However, a deeming fiction was created in the Indian transfer pricing regulations in 2014, wherein the transactions between two unrelated enterprises shall be considered as an international transaction between associated enterprises. Two preconditions must be met for transactions between unrelated parties to be considered deemed international transactions, which are:
The existence of an initial agreement concerning the relevant transaction between such other person and its associated enterprise; or
The terms of the apt transaction are determined primarily and in substance between such other person and its associated enterprise in that prior agreement.
It should be noted that a transaction that meets the above two conditions will be deemed to be an international transaction, whether the other person is a non-resident or not.
Deemed international transaction with unrelated domestic third party Contrary to section 92B (1), which explicitly states that at least one of the parties to an international transaction must be a non-resident, section 92B(2) does not specify whether an unrelated third party with whom the Indian taxpayer transact is needed to be a non-resident or not.
Subsequently, to put litigation on this anomaly to rest, Finance Act, 2014 elucidated that even a deal between a taxpayer with a resident unrelated resident third party should be deemed an international transaction if it is done by prior agreement between the third party and associated non-resident enterprise.
Specified domestic transaction The definition of specified domestic transactions was placed in the Income Tax Act, 1961 by the Finance Act, 2012. As a result, certain domestic transactions between domestic companies were considered domestic transactions subject to domestic transfer pricing regulations.
Following are the designated conditions that are needed to categorize transactions as a particular domestic transaction:
The transaction should not be an international transaction.
The transaction should be covered under any limb (ii) to (vi) of section 92BA.
The taxpayer’s aggregate of such transactions should exceed the threshold limit of INR 20 crores (from the assessment year 2016-17).
According to the provisions of the act, once a transaction falls under the stated domestic transaction, all the compliance necessities relating to transfer pricing documentation, accountant’s report, etc., shall apply to it in the similar manner as they apply for international transactions.
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