Implications of Transfer Pricing in Cross-Border Deals

Ratio of the Case: Domestic Leg of a Global Sale of business not covered under TP regime if terms not stated by parent Associated Enterprise

CLR Editorial Notes: Eastman Kodak, USA, entered into an agreement with Onex Healthcare Holdings, USA, for the global sale by Eastman of the medical business to Onex for a consideration of USD 23.5 Billion. With reference to this deal, the assessee in this case, which was an Indian subsidiary of Eastman Kodak, sold the Indian business to the Indian subsidiary of Onex for a consideration of USD 13.54 Million. In its assessement, the assessee claimed that as it was not an Associated Enterprise of the buyer and as both the seller and the buyer were residents, the transfer pricing provisions did not apply.

However, the Transfer Pricing Officer invoked the provisions of section 92B(2) and held that though the transaction was with a person other than an Associated Enterprise, it attracted the transfer pricing provisions as there was a prior agreement in relation to the said transaction between such other person and the Associated Enterprise and/or the terms of the relevant transaction were determined in substance between such other person and the Associated Enterprise. The Transfer Pricing Officer computed the Arms Length Price by applying the ratio of revenue method and determined the Arms Length Price at USD 32.9 million and made an adjustment of Rs. 79.96 crores. This was eventually upheld by the DRP.

The assessee appealed to the Tribunal, which reversed the decision of the Transfer Pricing Officer & DRP and HELD :

(i) Though s. 92B(2) provides for a situation where even a transaction between two non-associated enterprises can be subject to the transfer pricing provisions, it is essential that there should first be an AE with whom there exists an international transaction before it can be examined whether the international transaction with the the non-AE exists or not. On facts, the agreement between the two foreign companies was independent of the agreement between the two Indian domestic companies. The assessee had full authorization to perform and take its own decision with regard to the sale of the imaging segment to the buyer. Even if one accepts that the sale agreement by the assessee was as the result of prior agreement or was consequential upon the agreement between the two non resident companies, yet, as the holding company had not dictated the terms and conditions of the sale and the entire exercise of transfer of imaging segment was independently done on its own terms by the assessee and the buyer, the deeming provision of s. 92B(2) does not apply. The Department™s argument that the legal character of the assessee and the other enterprise be disregarded due to the influence of the agreement between the foreign holding companies is not acceptable (Vodafone vs. UOI 341 ITR 1 (SC) followed); 

(ii) Further, the TPO was not justified in adopting an alien method for arriving at the ALP. U/s 92C(1) read with Rule 10B, the ALP can be determined only by adopting one of the prescribed methods and by no other (LG Electronics (SB) followed).


Case Files available for download


Main Case file: 

  • Kodak India Pvt. Ltd vs. ACIT (ITAT Mumbai)

Reference Case Files:

  • Vodafone International Holdings B.V. vs. UOI (Supreme Court)
  • L.G.Electronics India Pvt. Ltd vs. ACIT (ITAT Delhi Special Bench)


Tags: Eastman KodakIndiaLG Electronicstransfer pricingVodafone

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