Case Law: Orchid Pharma Limited vs. DCIT (ITAT Chennai)

Transfer Pricing – Meaning of “Associated Enterprises”: The fact that an enterprise can “influence prices and other conditions relating to sale” does not make it an “associated enterprise” of the assessee if it does not participate in the (a) capital, (b) management, or (c) control of the assessee and thus does not fulfil the basic rule u/s 92A(1). S. 92A(2)(i) has to be read with s. 92(A)(1). Even if the conditions of s. 92A(2)(i) are fulfilled, these enterprise cannot be treated as ‘associated enterprise’ if the requirements of s. 92A(1) are not fulfilled

The definition of ‘associated enterprise’, as the above academic analysis shows, has two approaches- wider approach and narrow approach. A narrow approach to the concept of associated enterprises takes into account only “de jure” association i.e. though formal participation in the capital or participation in the management. A wider approach to the concept of ‘associated enterprises’ takes into account not only the de jure relationships but also de facto control, in the absence of participation in capital or participation in management, through other modes of control such as commercial relationships in which one has dominant influence over the other. This wider concept is clearly discernible from the principles underlying approach to the definition of ‘associated enterprises’ in the tax treaties and has also been adopted by the transfer pricing legislation in India in an unambiguous manner. There is no other justification in the Indian transfer pricing legislation, except the participation in capital of an enterprise, management of an enterprise or control of an enterprise, which can lead to the relationship between enterprise being treated as ‘associated enterprises’. What essentially follows is that clause (i) of Section 92A(2) has, at its conceptual foundation, de facto control by one of the enterprise over the other enterprise, on account of commercial relationship of its buying the products, either on his own or through any nominated entities, from such other enterprise and in a situation in which it can influence the prices and other related conditions. The wordings of clause (i), however, do not reflect this position in an unambiguous manner inasmuch as it does not set out a threshold of activity, giving de facto control to the other enterprise engaged in such commercial activity, in percentage terms or otherwise- as is set out in clause (g) and (h) or, for that purpose, in all other operative clauses of Section 92A(2)

Orchid Pharma Limited vs. DCIT (ITAT Chennai)

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