| Definition of international transaction |
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| 4.1 The provisions of sections 92 to 92F apply only to ‘international transactions’ between associated enterprises. ‘International transaction’ has been defined in section 92B(1) as follows :
“For the purposes of this section and sections 92, 92C, 92D and 92E, international transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include 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.”
Thus, the following transactions would constitute an ‘international transaction’ under section 92B(1) :
- A transaction between two or more associated enterprises, either or both of whom are non-residents,
(i) in the nature of
- purchase, sale or lease of tangible or intangible property
- provision of services
- lending or borrowing money
or
(ii) having a bearing on the profits, income, losses or assets of such enterprises.
- A mutual agreement or arrangement between two or more associated enterprises for the
- allocation or apportionment of, any cost or expense incurred or to be incurred
- 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.
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| Transaction having bearing on income, etc. |
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| 4.2 This portion of the definition is very wide and on a plain reading, it would cover any transaction apart from those specified in the preceding portion of the definition (purchase, sale, etc.). It may be noted that a transaction would be covered only if it has a bearing on the profits, income, losses or assets of all the enterprises.
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| Transaction |
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| 4.3 ‘Transaction’ has been defined in section 92F(v) as follows :
“‘Transaction’ includes an arrangement, understanding or action in concert :
- whether or not such arrangement, understanding or action is formal or in writing; or
- whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings.”
This definition is an inclusive definition. It encompasses transactions which are not transactions as are normally understood. Thus, all types of arrangements, understanding or actions in concert, whether oral or written, whether formal or informal, whether intended to be enforceable by legal proceeding or not are covered.
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| 4.3.1 ‘Arrangement’ - The word ‘arrangement’ is apt to describe something less than a binding contract or agreement, something in the nature of an understanding between two or more persons - a plan arranged between them which may not be enforceable at law—Newton v. Commissioner of Taxation of the Commonwealth of Australia [1958] 2 All ER 759, 763 (PC).
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| 4.3.2 ‘Understanding’ - Understanding has been defined in Oxford Dictionary as an agreement of an informal but more or less explicit nature.
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| Non-resident |
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| 4.4 An international transaction can be between two or more associated enterprises. However, the use of the words ‘either or both of whom are non-residents’ gives an impression that only two associated enterprises are contemplated in an ‘international transaction’. Hence, the use of the words ‘either or both’ appears to be an error and to give effect to the intention of the legislature, one will have to substitute ‘either or both’ by ‘any one or all’.
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| Cost sharing transactions |
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| 4.5 As mentioned above, cost sharing transactions are covered by the second limb of the definition and hence they are international transactions. Unlike the first category of transaction, this type of transaction do not expressly require at least one non-resident to be involved as an associated enterprise in the transaction. Does this imply that a mutual agreement or arrangement between two or more associated enterprises, all of whom are residents is also covered ?
On a literal reading of the provisions, it appears that it is not essential that at least one non-resident should be involved as an associated enterprise in the transaction. However, having regard to the purpose, it is essential that at least one of the associated enterprise should be a non-resident. It seems that the absence of the words ‘either or both of whom are non-residents’ in the second limb of the definition appears to be inadvertent.
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| Deemed international transaction |
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| 4.6 Section 92B(2) deems transactions between an enterprise and another person as transactions entered into between two associated enterprises if any of the following circumstances exist :
- There is a prior agreement in relation to the relevant transaction between such other person and the associated enterprise.
- The terms of the relevant transaction are determined in substance between such other person and the associated enterprise.
Thus, such transactions could also be considered as international transactions.
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