A division bench of the Gujarat High Court, recently in Pr. CIT v. M/s Veer Gems, held that mere fact that an enterprise has de facto participation in the capital, management or control over the other enterprise does not make the two enterprises “associated enterprises” so as to subject their transactions to the rigors of transfer pricing laws.
In the instant case, assessee, M/s Veer Gems has made substantial purchases from another concern, M/s. Blue Gems BVBA. The entire partnership of the assessee firm are held by family members. One of the brothers of the family had control over the entire share holding of M/s Blue Gems BVBA. AO found that M/s. Blue Ge,s BVBA is closely related with M/s. Veer Gems and falls within the parameters of sec. 92A(2) j,k and m since it is clear that both the entitites are being controlled by the same family of four brothers and their close relatives.
The Tribunal, on second appeal, concluded the matter in favour of the assessee and held that none of the provisions of Clauses j, k and l of sub-section 2 of Section 92A of the Income Tax Act would apply in the present case and therefore the assessee M/s. Veer Gems and its supplier of rough diamonds M/s. Blue Gems are not associated enterprises.
Aligning with the above findings, the Justices Akil Khureshi and Biren Vaishnav said that “Clause (i) would apply in a case where goods or articles are manufactured or transferred by one enterprise. In the present case, admittedly M/s. Blue Gems does not either manufacture or process any articles. It merely purchases rough diamonds from the international markets and supplies to the assessee. Clause (j) would apply when an enterprise is controlled by an individual. In the present case, both the enterprises are partnership firms. There is nothing to suggest that they are controlled by any individuals. Clause (l) would of course apply in a case where the enterprise is a partnership firm. However, for applicability of the said clause, there has to be an enterprise in the nature of a firm and another enterprise who holds not less than 10% interest in such firms. Such facts are also not applicable in the present case. The Tribunal in our opinion therefore committed no error in holding that the assessee and M/s. Blue Gems not being associate enterprises, the question of applying transfer pricing formula would not arise.”
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