Prior agreement key to categorisation of international transaction: Tax ruling


MUMBAI: A transaction between a company and its associated enterprise has to be categorised as negotiating services and not as deemed purchases if no prior agreement is in place, a tax tribunal has ruled.

As per the details of the case Gujarat Gas Trading Company had entered into an international transaction for corporate guarantee with BG Energy Holding. The associated enterprise—BG Energy Holding had also entered into an agreement to purchase of natural gas with Cairn Energy Group (“Cairn”) from its Laxmi Gas field.

The tax official said that this was an international transaction between Gujarat Gas Trading Company and BG Energy Holding, mainly due to the latter’s arrangement with Cairn Energy. The tax department said that the contract of purchase of gas from Cairn was transferred by BG Energy to Gujarat Gas Company. The tax department was of the view that the transaction of purchase of gas from Cairn was covered under the definition of “international transaction.”


Income Tax Appellate Tribunal ruled that if there is no prior agreement as envisaged under section 92B(2), then that section does not have any application. The taxpayer referred to the copy of agreements between ONGC, World Tata Patrodyne Ltd., Cairn Energy group of companies and Gujarat Gas Limited and contended that the price was negotiated between the parties to the agreement and there was no role of the AE to negotiate the price of the gas purchased by the taxpayer and the AO had wrongly made the addition.

“Deemed international transactions were introduced to the Income Tax Act, 1961 to emphasize the ‘substance’ of transactions over their legal form. In other words, the intention of the section 92B(2) is to cover all the transactions/arrangements which are disguised as uncontrolled transactions and thereby to curb any attempt by taxpayer /enterprises to circumvent the transfer pricing provisions. However, there is ambiguity in the interpretation of the provision of the said section,” a Nangia Anderson tax note said.

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