Meaning of international transaction.
163(1)
In this Chapter, “international transaction” means a transaction between two or more associated enterprises, one of which is necessarily a non-resident, and includes—
- (a) the purchase, sale, transfer, lease or use of tangible property, including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing;
- (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature;
- (c) capital financing, lending and borrowing of money, including,–– (i) any type of long-term or short-term borrowing, lending or guarantee; or (ii) purchase or sale of marketable securities; or (iii) any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;
- (d) provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service;
- (e) a transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has any bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date;
- (f) a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises; and
- (g) any other transaction having a bearing on the profits, income, losses or assets of such enterprises.
163(2)
A transaction entered into by an enterprise with a person other than an associated enterprise (“other person”) shall, for sub-section (1), be deemed to be an international transaction entered into between two associated enterprises, if—
- (a) there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise; or
- (b) the terms of the relevant transaction are determined, in substance, between such other person and the associated enterprise, and the enterprise or the associated enterprise or both of them are non-residents, irrespective of whether the other person is a non-resident or not.
163(3)
The expression “intangible property” shall include the following,—
- (a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos; v(b) technology related intangible assets, such as, process patents, patent applications, technical documentation such as laboratory notebooks, technical know-how;
- (c) artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps, engravings;
- (d) data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters;
- (e) engineering related intangible assets, such as, industrial design, product patents, trade secrets, engineering drawing and schematics, blueprints, proprietary documentation;
- (f) customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders;
- (g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non-compete agreements;
- (h) human capital related intangible assets, such as, trained and organised work force, employment agreements, union contracts;
- (i) location related intangible assets, such as, leasehold interest, mineral exploitation rights, easements, air rights, water rights;
- (j) goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value;
- (k) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists or technical data; and
- (l) any other similar item that derives its value from its intellectual content rather than its physical attributes.
Explanation
Section Summary:
This section defines what constitutes an "international transaction" under the income tax law. It applies to transactions between associated enterprises, where at least one party is a non-resident. The definition is broad and includes various types of transactions, such as the transfer of tangible or intangible property, capital financing, provision of services, business restructuring, and cost-sharing arrangements. The section also clarifies that certain transactions with non-associated enterprises can be deemed international transactions if specific conditions are met.
Key Changes:
- Expanded Scope of International Transactions: The definition now explicitly includes business restructuring, cost-sharing arrangements, and transactions involving intangible property. This broadens the scope of what is considered an international transaction.
- Deemed International Transactions: Transactions with non-associated enterprises can now be treated as international transactions if there is a prior agreement or if the terms are determined by an associated enterprise.
- Detailed Definition of Intangible Property: The section provides an exhaustive list of intangible assets, which was not as detailed in prior laws.
Practical Implications:
- Increased Compliance Burden: Businesses involved in cross-border transactions must carefully evaluate whether their transactions fall under the definition of international transactions. This includes reviewing agreements and terms to ensure compliance.
- Transfer Pricing Scrutiny: Transactions involving intangible property, business restructuring, or cost-sharing arrangements may attract closer scrutiny from tax authorities, especially in transfer pricing audits.
- Impact on Multinational Enterprises (MNEs): MNEs with complex structures or frequent cross-border transactions must ensure proper documentation and adherence to transfer pricing rules to avoid disputes.
Critical Concepts:
- Associated Enterprises: These are entities that are related through ownership, control, or management. For example, a parent company and its subsidiary.
- Non-Resident: A person or entity that is not a tax resident in India.
- Intangible Property: Assets that lack physical substance but have value, such as patents, trademarks, and customer lists. The section provides a detailed list of such assets.
- Deemed International Transactions: Transactions with non-associated enterprises can be treated as international transactions if they meet specific criteria, such as prior agreements or terms determined by associated enterprises.
Compliance Steps:
- Identify International Transactions: Review all transactions involving associated enterprises and non-residents to determine if they fall under the definition.
- Maintain Documentation: Keep detailed records of agreements, terms, and pricing for all international transactions, especially those involving intangible property or business restructuring.
- Transfer Pricing Documentation: Ensure compliance with transfer pricing regulations, including maintaining contemporaneous documentation and filing Form 3CEB.
- Review Agreements: Examine agreements with non-associated enterprises to determine if they could be deemed international transactions under this section.
Examples:
- Tangible Property Transfer: An Indian company sells machinery to its foreign subsidiary. This is an international transaction under clause (a).
- Intangible Property Transfer: An Indian company licenses its trademark to a foreign associated enterprise. This falls under clause (b) and involves intangible property.
- Deemed International Transaction: An Indian company enters into a contract with a non-associated foreign entity, but the terms are determined by the Indian company’s foreign parent. This could be deemed an international transaction under sub-section (2).
- Business Restructuring: An Indian company transfers a division to its foreign subsidiary as part of a restructuring plan. This is covered under clause (e).
By understanding this section, taxpayers can better navigate the complexities of international transactions and ensure compliance with Indian tax laws.