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25 January 2017

Form of participation in another enterprise to be satisfied to deem two entities as AEs

The assessee is engaged in the business of manufacture and sale of polished diamonds. The assessee entered into an international transaction with a Belgian Entity by name Blue Gems BVBA. The Assessing Officer (AO) was of the view that the said entity would qualify to be Associated Enterprises (AEs) on the ground that the assessee and Blue Gems BVBA were controlled by the same family and the assessee made substantial purchases from Blue Gems BVBA. Considering them to be AEs, an Arm’s Length Price (ALP) adjustment was made. The CIT(A) deleted the ALP adjustment but did not adjudicate on the primary question of whether the two entities can be termed as AEs at all.
 
Hon’ble Tribunal found the approach of the Ld. CIT(A) to be incorrect holding that the first thing that needs to be adjudicated upon is whether or not the two entities can be considered to be AEs. In the facts of the present case, the AO had invoked clause (j) of Section 92A(2) wherein two enterprises are given to be associated enterprises if one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual.
 
The ITAT opined that the assesse (Veer Gems) being a partnership concern could not be controlled by ‘an individual’. Referring to the Memorandum explaining the provisions of the Finance Bill, 20002 the Tribunal held that Section 92A(2) provides exhaustive illustrations for the purposes of sub-section (1). The Hon’ble Tribunal observed that sub-section (1) and sub-section (2) have to be read together and that if a form of participation in management and control is not recognized by sub-section (2), even if it results in defacto or dejure participation in management, capital or control, it would not result in the two enterprises being treated as associated enterprises.