Income from transaction with Non-Residents – Transfer Pricing

Applicability

  • Section 92 is the charging section for Chapter X of the Act. Sec 92 provides that any income arising from an ‘International transaction’ shall be computed having regard to ALP.
  • For this purpose, the allowance for any expense or interest shall be determined on the basis of ALP.
  • Further, where two or more enterprises enter into mutual agreement or arrangement for cost allocation or cost contribution, they would also be covered within sec 92 and would be subject to ALP.

This provision will not be applicable –

While determining ALP under the provisions of TPR, if the income works out to a figure lower than the income shown in the books of accounts or if the expense works out to a figure higher than the one in the books of accounts. The terms referred in the section are defined in section 92F

Associated Enterprises [Section 92A]

Definition of the term Associated Enterprise

  • The term AE in relation to ‘another enterprise’ is defined in section 92A(1):
  • which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise
  • in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise

Deemed Associated Enterprises

  • Section 92A(2) provides that two enterprises shall be deemed to be associated enterprises for the purposes of sub-section(1) if, at any time during the previous year:
Deemed Associated
Deemed Associated 1
Deemed Associated 2
Deemed Associated 3
Deemed Associated 4
Deemed Associated 5
  • It is important to understand that both direct and indirect holding of voting rights would be covered in the definition.

Meaning of certain terms

  • To understand who would be regarded as associated enterprises, we need to understand the term ‘Enterprise’. Section 92F defines the terms relevant to Chapter X
  • The term ‘enterprise’ is defined in Section 92F to mean a person who is or who proposes to engage in any activity relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or know-how etc, or the provision of services of any kind, or in carrying out any work in pursuance of a contract, or in investment, or providing loan or in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate, whether such activity or business is carried on, directly or through one or more of its units or divisions or subsidiaries, or whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place or places. This includes Permanent Establishment.
  • Permanent Establishment includes a fixed place of business through which the business of the enterprise is wholly or partly carried on
  • Important Notes:
  • Definition of AE does not refer to the residential status of the transacting enterprises.
  • Even if the conditions regarding two enterprises to be AEs are met only on one day of the PY, the enterprises would be regarded as AEs for the relevant PY.

Question

A USA Inc holds 50% equity shares in B USA Inc and B USA Inc holds 26% shares in C Ind Ltd. Whether A USA and C Ind Ltd are AEs.

  1. They are not AEs since A USA Inc does not hold more than 26% of voting rights in C Ind Ltd
  2. They are not AEs since A USA Inc is non-resident in India.
  3. A USA and C Ind are AEs.

Answer c.

A USA Inc does hold more than 26% of voting rights in C Ind Ltd not directly but indirectly. The Section 92A is clear that both direct or indirect holding would have to be considered. Further the definition of AE does not refer to residential status, so whether both are residents or residents does not matter

Question

Two enterprises shall be deemed to be associated enterprises if a loan advanced by one enterprise to the other enterprise constitutes?

  1. 50% or more of the book value of the total assets of the other enterprise
  2. Less than 50% of the book value of the total assets of the other enterprise
  3. More than 51% of the book value of the total assets of the other enterprise
  4. 51% or more of the book value of the total assets of the other enterprise

Answer d.

Two enterprises shall be deemed to be associated enterprises if a loan advanced by one enterprise to the other enterprise constitutes 51% or more of the book value of the total assets of the other enterprise.

Question

H Inc. (USA) advanced loan of Rs.130 crores to P India. Select the correct statement.

  1. Both are Associated enterprises when P India has total assets worth Rs.250 crores
  2. Both are Associated enterprises when P India has total assets worth Rs.260 crores
  3. Both are Associated enterprises when P India has total assets worth Rs.300 crores
  4. Both are Associated enterprises irrespective of the loan amount

Answer a.

Two enterprises shall be deemed to be associated enterprises if a loan advanced by one enterprise to the other enterprise constitutes 51% or more of the book value of the total assets of the other enterprise. Rs 130 crores is more than 51% of Rs.250 crores.

Question

Z India Private Ltd. borrowed Rs.1000 crores from an CitiBank. Y Plc (UK) guaranteed the borrowings of Z India. Select the correct statement.

  1. Both are Associated enterprises when the Y Plc guarantees Rs.80 crores on behalf of Z India
  2. Both are Associated enterprises when the Y Plc guarantees Rs.98 crores on behalf of Z India
  3. Both are Associated enterprises irrespective of amount of guarantee made by Y Plc
  4. Both are Associated enterprises when the Y Plc guarantees Rs.100 crores on behalf of Z India

Answer d.

Two enterprises shall be deemed to be associated enterprise when one enterprise Guarantees 10% or more of the total borrowings of the other enterprise. In this case the guaranteed amount is 10% of the borrowings so they are AEs.

Question

A India and B Singapore shall be deemed to be AEs.

  1. Only if more than half of the Board of Directors of each of the A India and B Singapore are appointed by AB Inc, USA
  2. Only if one Executive Director of each of the A India and B Singapore are appointed by AB Inc, USA
  3. Only if one Executive Members of the Governing Board of each of the A India and B Singapore are appointed by AB Inc, USA
  4. Even if one of the above conditions is satisfied.

Answer d.

A India and B Singapore shall be deemed to be AEs if more than half of the Board of Directors of each of the A India and B Singapore are appointed by AB Inc, USA, or one Executive Director of each of the A India and B Singapore are appointed by AB Inc, USA or one Executive Members of the Governing Board of each of the A India and B Singapore are appointed by AB Inc, USA

Question

Alpha Inc (USA) supplied raw material K, worth Rs.270 crores to Beta India during the FY 2019-20. Both enterprises would be deemed as associated enterprises when Beta India consumed total raw material K of

  1. Rs 400 crore during FY 2019-20
  2. Rs 540 crore during FY 2019-20
  3. Rs 2700 crores during FY 2019-20
  4. Rs 300 crores during FY 2019-20

Answer d.

Alpha and Beta would be deemed as AEs if 90% or more of raw materials and consumables required for the manufacturing of goods Beta are supplied by the Alpha. Rs 270 crore meets the threshold 90% they are not AEs

Question

A Inc USA had 28% shares in B India. On 2nd April 2019, A USA sold 5% of its shares in B India to M India. Which of the below statement is correct?

  1. A and B are AEs forever since once an AE always an AE
  2. A and B are not AEs for FY 2019-20 since as on March 31, 2019 A USA has less than 26% of shareholding in B India
  3. M India and B India are AEs
  4. A and B are AEs for FY 2019-20 since as per section 92A, if the conditions are met any time during the year.

Answer d.

Section 92A(2) provides that two enterprises shall be deemed to be associated enterprises for the purposes of sub-section(1) if, at any time during the previous year.

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