Transaction Between Head Office and Overseas Branch Is an International Transaction Under Transfer Pricing Law: Gujarat High Court Upholds Reference to TPO Against Axis Bank

Permanent Establishment Treated as Separate Enterprise by Legal Fiction—Transfer Pricing Provisions Apply Even Within Same Entity: Gujarat High Court in Axis Bank Limited v. The Assistant Commissioner of Income Tax & Another [Special Civil Application No. 1717 of 2021] delivered a significant ruling on the interpretation of “international transaction” under the Income Tax Act. The Court upheld the reference made by the Assessing Officer (AO) under Section 92CA(1) to the Transfer Pricing Officer (TPO) for Assessment Year 2017–18, rejecting Axis Bank’s contention that transactions between its Indian head office and foreign branches do not qualify as international transactions under Chapter X of the Act.

A Division Bench comprising Justice Bhargav D. Karia and Justice D.N. Ray decisively ruled: “By this deeming fiction although a Permanent Establishment (P.E.) is part of the same enterprise, however, for the purpose of transfer pricing regulation, the same is deemed to be an associated enterprise… Therefore, there are two entities involved.”

“Once Branch Becomes PE, It Qualifies as Non-Resident and Transfer Pricing Applies”
Axis Bank had argued that since both the Indian head office and foreign branches are part of the same legal entity, they could not be ‘associated enterprises’, and hence, the transactions were not ‘international’ in nature. The bank also submitted that its entire global income, including that of foreign branches, is consolidated and taxed in India, thereby leaving no scope for income shifting or tax avoidance.

The Court, however, endorsed the TPO’s reasoning that a Permanent Establishment (PE), though part of the same entity, is treated as a separate enterprise by legal fiction for transfer pricing purposes, and therefore: “The P.E. of the assessee in the form of branch office outside India would be an Associated Enterprise… The status of the head office would be resident, but the P.E. would be considered a non-resident entity under the Act.”

The Court cited Article 7(3) of the India–Sri Lanka DTAA, which specifically allows interest deduction between a PE and its head office in banking businesses, and held that the existence of taxable transactions necessitates arm’s length pricing.

“Global Consolidation Argument Fails—Transfer Pricing Looks at Individual Transactions, Not Aggregate Income”
The Court also addressed the bank’s argument that its total income remains the same whether or not arm’s length pricing is applied, because the consolidated global income is taxed in India.

Rejecting this view, the Bench stated: “Transfer pricing regulations are applicable not on the basis of consolidated results, but on the basis of specific transactions between Associated Enterprises… There is a clear base erosion and shifting of tax base from India to outside India if such transactions are not benchmarked.”

The Court gave the example of under-invoicing between the HO and branch, which could result in higher profits being booked in a low-tax jurisdiction, and thereby reduce India’s tax base.

“CBDT Instruction 3 of 2016 Fully Complied—Satisfaction Was Recorded and Opportunity Was Provided”
The Bank had further contended that the mandatory satisfaction requirement under Instruction No. 3 of 2016 issued by the CBDT had not been fulfilled and that adequate opportunity had not been given before referring the case to TPO.

The Court found these arguments unpersuasive. It held: “The Assessing Officer had recorded satisfaction under paragraph 3.4 of CBDT Instruction 3/2016 that there is an income or potential income arising and/or being affected on determination of the ALP… A speaking order was passed and duly communicated to the petitioner.”

The claim that the petitioner had not received the speaking order was termed as “contrary to the record” since the order was issued via ITBA and emailed to the concerned officials.

“Transactions with Branches in Sri Lanka, Dubai, Singapore Not Disclosed—Form 3CEB Was Incomplete”
It was found that Axis Bank failed to report international transactions with overseas branches located in Sri Lanka, Dubai, and Singapore in the mandatory Form 3CEB under Section 92E. The Court noted: “The transactions were not disclosed, benchmarking was not carried out, and hence penalty proceedings under Section 271AA were rightly proposed by the TPO.”

Even for Assessment Year 2016–17, where a similar issue arose, the TPO had held that the omission was not excusable merely because the income was eventually taxed.

No Interference Warranted—Reference to TPO Was Legally Justified
The Gujarat High Court, after a detailed analysis of statutory provisions, CBDT instructions, judicial precedents, and the TPO’s earlier findings, dismissed the petition. It upheld the reference made by the Assessing Officer and confirmed that transfer pricing law squarely applies to intra-entity international transactions involving a PE.

In the words of the Court: “The argument that there can be no international transaction with oneself is negated by the legal fiction created in the Income Tax Act. A PE is treated as a separate enterprise, and its transactions with the HO are subject to transfer pricing scrutiny.”

Date of Decision: 18 March 2025