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

Transfer Pricing: Domestic leg of cross-border deal, even if consequential to overseas deal by parent AE, not covered if terms not dictated by parent AE

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. Pursuant to this, the assessee, the Indian subsidiary of Eastman Kodak, sold the Indian business to the Indian subsidiary of Onex for a consideration of USD 13.54 Million. 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 TPO invoked s. 92B(2) and held that though the transaction was with a person other than an AE, it attracted the transfer pricing provisions as there was a prior agreement in relation to the said transaction between such other person and the AE and/or the terms of the relevant transaction were determined in substance between such other person and the AE. The TPO computed the ALP by applying the “ratio of revenue” method and determined the ALP at USD 32.9 million and made an adjustment of Rs. 79.96 crores. This was upheld by the DRP. On appeal by the assessee to the Tribunal, HELD reversing the TPO & DRP:

(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).