The term International Transaction refers to the transactions between two or more associated enterprises, where at least one of the parties is a non-resident. International transactions can be in the form of purchase, sale or lease of tangible or intangible property, lending or borrowing of money or any other transactions that may have an impact on the profits, income, losses or assets of the concerned enterprises. According to Section 92F (v) of the Income Tax Act, a transaction involves an agreement, understanding or action; the nature of which could be formal or informal, oral or written – which may or may not be agreed with the object of being legally enforceable. An international transaction is constituted by an agreement or arrangement between two or more associated enterprises. The present article provides a brief overview of international transactions.
Relevance in Transfer Pricing
The concept of international transactions hold particular significance with regard to the issue of the Transfer Pricing Regulations; given that a transaction falls under the ambit of Transfer Pricing Regulations if it is classified as International Transaction, Deemed International Transaction or Specified Domestic Transaction performed between Associated Enterprises with fall within the ambit of taxability. Taxpayers should note that transfer pricing is the name which is bestowed upon the techniques and methodologies of implementation for pricing transactions within and between enterprises which are falling under common ownership or control.
Extension of Scope
The scope of international transactions has been further extended from what has been described thus far. The definition which is of an extended nature prompts for the classification of the following transactions as international:
- Transactions that involve the nature of purchase, sale or lease of tangible or intangible properties.
- Transactions that involve the service of one party to another.
- Capital Financial Transactions involving the lending and borrowing of money for short- and long-term purposes.
- Transactions that cover cost allocation or apportionment between the Associated Enterprises.
- Transactions of the nature of business reconstruction and reorganization.
- Any other transactions which may impact the profits, income, losses or assets of an enterprise.
Purchase, Sale or Lease of Tangible/Intangible Property
Transactions in the nature of purchase, sale or lease of tangible or intangible property between Associated Enterprises would be considered as international transactions for the purpose of Transfer Pricing Regulations.
Provision of Services
International transactions include the provision of services between two or more associated enterprises. As per a recent update, the scope of such services now entails the provision of market research, market development, marketing management, administration, technical services, repairs, design, consultation, agency, scientific research, and legal or accounting services.
Capital Financing Transactions
Capital Financing Transactions refer to financial transactions such as lending or borrowing of money, the provision of a guarantee, and other similar items. These transactions are classified international due to its influence on the profits and losses of an enterprise. The scope of capital transactions is now extended and includes aspects of guarantee and purchase/sale of marketable securities.
The extended definition of this concept involves an agreement/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 concerning a benefit, service, facility provided or to be provided to any such enterprises.
Transactions Covering Business Restructuring/Reorganization
Business restructuring/reorganization could be in the form of:
- Organizational change – change in the ownership structure or management of the group entities.
- Operational change – change in the functional, asset and risk profile of the group entities.
Deemed International Transaction
The concept of Deemed International Transaction was inserted into the Transfer Pricing Regulations in the year 2014 to prevent Associated Enterprises from routing their transactions through unrelated parties so as to avoid compliance with the applicable rules and regulations. According to the newly formed mandate, transactions between two unrelated parties would be deemed as an international transaction between Associated Enterprises. This provision is subject to:
- The existence of a prior agreement concerning the relevant transaction between such person and its Associated Enterprise.
- The inclusion of the terms of the relevant transaction and its substance in the prior agreement.