India’s transfer pricing rules are designed to prevent the use of transfer prices between related enterprises to shift profits away from India to a lower tax jurisdiction. The rules are therefore generally concerned with international transactions between an Indian enterprise and a foreign related party.

In a recent decision of  the Mumbai Bench of the Income-tax Appellate Tribunal, it was held that for a transaction  to be subject to India’s transfer pricing rules as a “deemed international transaction,” the transaction must an international transaction — that is, one or both of the parties to the transaction must be non-residents.

The case concerned a transaction between two Indian subsidiaries of multinational companies. Their parent companies had reached an agreement whereby Eastman Kodak USA arranged for the worldwide sale of its medical business to Care stream USA. The transaction between the two Indian subsidiaries followed the signing of this agreement. Kodak India sold its medical business to the Indian subsidiary of Care stream USA.

Originally the transfer pricing officer decided that the transfer pricing rules applied because the transaction was part of a global agreement involving the foreign parent companies. The tribunal determined however that the transfer pricing rules did not apply because the parent companies had not dictated the terms of the agreement to their subsidiaries. The terms of the sale agreement had been decided between the Indian companies themselves.

It was also decided that the Transfer Pricing Officer cannot apply any method other than a prescribed method in the statute for purposes of determining the arm’s length price of the transaction.