Inputs Needed -- Under Section 92A(2)

We have been approached by an Indian company to provide advice on whether the Indian TP code is attracted for its proposed transactions with an unrelated overseas company. The facts of the case are as follows:

1.The Indian company is engaged in undertaking a host of business activities in the travel industry.
2.The Indian company plans to commence a new business activity for which it proposes to enter into an agreement with the overseas company whereby it will license the necessary know-how / brand name owned by the overseas company. The Indian company will also receive certain management consultancy services from the overseas company for the proposed business activity.
3.The Indian company would have an exclusive right to use the know-how / brand name and to avail the management consultancy services in India.
4.The proposed business activity will constitute about 5% of the total business of the Indian company.

Could this arrangement between the Indian company and the overseas company be covered under Section 92A(2)(g) that says:

the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights

Should "business carried out by one enterprise being wholly dependent" be inferred to read entire business of the enterprise or could it also imply one business segment of the enterprise?

If someone has analysed this issue before, request you to kindly drop a mail to me and I will get in touch with you.

Thanks and best regards,
Rahul

Dear Rahul Sir,

Sorry for this delay in replying though I had gone through this post soon after it was posted but was not able to decide on 1 issue and it is still pending.

But I thought I should at least share my limited understanding on the subject and then after getting your response on that probably decide which way to go......:)

First for simplicity I would like to reproduce ur question as follows -

Law reads as -

business carried out by one enterprise is wholly dependent

Does it mean -

whole of the business carried out by one enterprise is dependent

I feel -

The answer is "Yes", VIRTUALLY the entire business should be dependent and not just a part of it (i:e originating from single or few transaction/agreements)

Reason –

1) The word "business" is capable of being measured/quantified in terms of production, revenue, etc whereas the word "dependent" is not capable of quantification being a subjective phrase and hence it will be meaningless to associate word "wholly" with "dependent".

Dependency can be looked from a perspective of a nature of transaction say production or processing or selling, etc but cannot be quantified as such. Further, "dependency" is as good as being "wholly dependent" since the job will remain uncompleted in the absence of even 1% of thing on which u depend gets fulfilled. I mean being “Independent” or “dependent” are the two MUTUALLY EXCLUSIVE states for a particular transaction and both cannot be present at any given point of time and where mere presence of one justifies the exclusion of the other.

2) TP law is anti-evasion and it seems to curb the unspoken thing/mischief, which is "influence" or rather "scope of influence" - In the context of present case, I don't think there is any "scope of influence" .....

3) This one is not a reason but is just a reply to few of the counter arguments that came to my mind -

Argument 1 - Requirement of dependency of "entire business" is too high limit?? It does not seems logical.

Answer 1 - Attention is invited to clause (h) of the same section - When law can ask that at least 90% of raw material should be supplied in order to become "associated enterprise" then why not ENTIRE business???

Argument 2 - Giving such a narrow meaning would defeat the basic objective as we are restricting the cases that can be covered under the said clause.

Answer 2 - If you say that anyone can defeat such an interpretation simply by booking a single fake unrelated transaction and will escape since then it will not be "wholly dependent” on it then I would say go back and read the word "VIRTUALLY" - I think in such cases the courts will deliver judgments in favor of the revenue.

Now let’s try to go into the reason for my delay in replying -

I have no doubt that the present case is out of the ambit of TP law provided your client is having only ONE ENTERPRISE with in the meaning of TP Law.

Now the issue that has cropped up -

Since the entire Income tax works on the principle of “assesee” but this TP law has added a new dimension to the chargeability by spelling it as “enterprise”.

Can an assesee have more than 1 enterprise as contemplated by TP Law?

Eg- A Ltd has 2 GEOGRAPHICALLY DISTINCT undertakings/Enterprises (in layman terms) – Enterprise D – Domestic & Enterprise G - Global respectively.

Each enterprise contributes 50% (or in any other proportion for that matter) of the total revenue of A Ltd. Now “G” does only the business as explained in your question.

Whether TP shall apply on Enterprise G?

How AN ASSESSEE should be distinguished from AN ENTERPRISE.?