DIRECT TAX (DT)
Additional Questions for Practice - Dec 2021 Exams
Transfer Pricing
Question 1
Examine whether transfer pricing provisions under the Income-tax Act, 1961 would be attracted in
respect of the following cases -
(i) Transfer of process patents by Rho Ltd., an Indian company, to ABC Inc., a US company, which
guarantees 12% of the borrowings of Rho Ltd.
(ii) Marketing management services provided by Athena, a Greece company to Alpha Ltd., an
Indian company. Athena is a “specified foreign company” as defined in section 115BBD, in
relation to Alpha Ltd.
(iii) Gamma Ltd., an Indian company, has two units, Delta & Phi. Unit Delta, which commenced
business four years back, is engaged in the development of a highway project, for which
purpose an agreement has been entered into with the Central Government. Unit Phi is carrying
on the business of trading in steel. Unit Phi transfers 25,000 metric tons of steel of the value of
₹ 30,000 per MT to Unit Delta for ₹ 20,000 per MT.
(iv) Purchase of machinery by Beta Ltd., an Indian company, from Huff AG, a German company.
Beta Ltd. is the subsidiary of Huff AG.
Answer
(i) The scope of the term “intangible property” includes, inter alia, process patents, which is a
technology related intangible asset. Transfer of intangible property falls within the scope of the
term “international transaction”. Since ABC Inc., a US company, guarantees not less than 10%
of the borrowings of Rho Ltd., an Indian company, ABC Inc. and Rho Ltd. are deemed to be
associated enterprises under section 92A(2). Therefore, since transfer of process patents by
Rho Ltd., an Indian company, to ABC Inc., a US company, is an international transaction
between associated enterprises, the provisions of transfer pricing are attracted in this case.
(ii) Clause (i) of Explanation to section 92B amplifies the scope of the term “international
transaction”. According to the said Explanation, international transaction includes, inter alia,
provision of marketing management services. Athena is a specified foreign company in relation
to Alpha Ltd. Therefore, the condition of Alpha Ltd. holding shares carrying not less than 26%
of the voting power in Athena is satisfied, assuming that all shares carry equal voting rights.
Hence, Athena and Alpha Ltd. are deemed to be associated enterprises under section 92A(2).
Since the provision of marketing management services by Alpha Ltd. to Athena is an
“international transaction” between associated enterprises, transfer pricing provisions are
attracted in this case.
(iii) Unit Delta is eligible for deduction@100% of the profits derived from its eligible business (i.e.,
the business of developing an infrastructure facility, namely, a highway project in this case)
under section 80-IA. However, Unit Phi is not engaged in any “eligible business”. Since Unit Phi
has transferred steel to Unit Delta at a price lower than the fair market value, it is an inter-unit
transfer of goods between eligible business and other business, where the consideration for
transfer does not correspond with the market value of goods. Therefore, this transaction would
fall within the meaning of “specified domestic transaction” to attract transfer pricing
provisions, since the aggregate value of such transactions during the year exceeds a sum of ₹
20 crore.
BY CA ATUL AGARWAL (AIR-1)
AIR1CA Career Institute (ACI)
Page 1.1
, DT Additional Questions for Practice - Dec 21
(iv) Purchase of tangible property falls within the scope of “international transaction”. Tangible
property includes machinery. Huff AG and Beta Ltd. are associated enterprises under section
92A, since Huff AG is a holding company of Beta Ltd. Therefore, purchase of machinery by Beta
Ltd., an Indian company, from Huff AG, a German company, is an international transaction
between associated enterprises, and consequently, the provisions of transfer pricing are
attracted in this case.
Question 2
Delta Ltd., an Indian company, declared total income of ₹ 2,100 crores computed in accordance with
Chapter IV-D before making primary adjustment, if required, in respect of the loan transaction with
Alps Inc, a Swiss company, for the year ended 31.03.2021. Alps Inc. had advanced a loan of Euro 350
crores carrying interest@9% p.a. on 1.4.2020 to Delta Ltd. The total book value of assets of Delta Ltd.
was ₹ 60,000 crores. Assume that the amount of interest computed@9% p.a. and payable to Alps Inc.
does not exceed 30% of EBITDA and that this is the only loan taken by Delta Ltd.
Alps Inc also advanced a loan of similar nature and amount to Beta Ltd., another Indian
company@7% p.a. during the F.Y. 2020-21. The value of 1 Euro may be taken as ₹ 88. You are
required to:
(i) Examine whether transfer pricing provisions under the Income-tax Act, 1961 would be
attracted in this case and if so, on what basis.
(ii) Advise Delta Ltd. regarding primary adjustments, if any, to be made to the above income
keeping in mind the transfer pricing provisions contained in the Income-tax Act, 1961 and
compute the total income for A.Y.2021-22.
(iii) Elaborate on secondary adjustments, if any, required to be made under the provisions of
Income-tax Act, 1961, assuming that Delta Ltd. has made the primary adjustment suo moto.
(iv) Calculate the additional income-tax liability, if Delta Ltd. opts for payment of additional
income-tax in lieu of making secondary adjustment.
Answer
(i) Delta Ltd., an Indian company and Alps Inc, a Swiss company are deemed to be associated
enterprises since the latter has advanced a loan to the former which constitutes 51.33% of the
book value of total assets of the former [Euro 350 crores x ₹ 88/Rs.60,000 crores]. Since the
loan advanced by Alps Inc is not less than 51% of the book value of the total assets of Delta
Ltd., the two companies are deemed to be associated enterprises.
A loan transaction between two enterprises, one of whom is a non-resident (Alps Inc,
Switzerland, in this case), would be an international transaction. Accordingly, transfer pricing
provisions would be attracted in this case.
(ii) The interest rate charged by Alps Inc. on loan advanced to Delta Ltd. is 9% p.a. whereas the
arm’s length interest charged by Alps Inc. in a comparable uncontrolled transaction with Beta
Ltd., another Indian company, is 7% p.a. Therefore, the arm’s length adjustment (primary
adjustment) to be made is = 9% - 7% = 2% of ₹ 30,800 crores (Euro 350 crores x ₹ 88, being
the value of 1 Euro) = ₹ 616 crores
The total income (after primary adjustment) of Delta Ltd for P.Y.2020-21 = ₹ 2,100 crores +
primary adjustment of ₹ 616 crores = ₹ 2,716 crores.
(iii) Since the primary adjustment has been made by Delta Ltd. suo moto while filing its return of
income for A.Y.2021-22, Delta Ltd. has to carry out secondary adjustment in the following
BY CA ATUL AGARWAL (AIR-
1)
Page 1.2
, DT Additional Questions for Practice - Dec 21
manner.
The excess money (i.e., ₹ 616 crores) lying with Alps Inc has to be repatriated within 90 days
from 30.11.2021, being the due date for filing return of income.
If the excess money is not repatriated on or before 28th February, 2022, it would be deemed as
an advance made by Delta Ltd. to Alps Inc and interest would be chargeable from 30.11.2021 at
six month LIBOR as on 30th September, 2021 + 3%, since the loan is denominated in Euros.
Such interest for the period from 30.11.2021 to 31.3.2022 (assuming that it has not been
repatriated upto 31.3.2022) would be included in the total income of Delta Ltd. for P.Y.2021-
22.
(iv) If Delta Ltd. opts for payment of additional income-tax, it has to pay ₹ 129.153 crores [i.e.,
20.9664% (tax@18% + surcharge@12% + cess@4%) of ₹ 616 crores].
Question 3
On 1-4-2020, Vihaan Ltd., an Indian company, advanced a loan of ₹ 6 crores to Yuvan Inc., a company
resident in Singapore. As on the date of loan, the book value of total assets in the books of Yuvan Inc.
was ₹ 4 crores. In the Financial Year 2019-20, Yuvan Inc. had revalued its assets and accordingly the
value of assets had increased by ₹ 2 crores. Yuvan Ltd. paid the entire loan along with interest
thereon on 31st August, 2020. During the Financial Year 2020-21, Vihann Ltd. also entered into an
agreement with Yuvan Inc. to provide 20 thousand medical equipments at a cost of ₹ 7,400 per unit.
The Assessing Officer treats them as associate enterprise and wants to re-compute the income of
Vihaan Ltd. at arms’ length price. You are required to answer the following questions in this respect:
(1) Would Vihaan Ltd. and Yuvan Ltd. be treated as associate enterprises for the purpose of
transfer pricing adopted by the Assessing Officer? If yes, why? '.
(2) Calculate the arm’s length price of Vihaan Ltd. which sells the same equipments at the rate of ₹
9,000 per unit to Y Ltd. and at the rate of ₹ 9,500 per unit to X LLP (both of them are unrelated
parties in respect of Vihaan Ltd.). Vihaan Ltd. is not a wholesale dealer.
(3) What are the options available to Vihaan Ltd. in respect of such increase in transfer price by
income tax authorities, if Vihaan Ltd. accepts such transfer price?
Answer
(1) Two enterprises are deemed to be associated enterprises as per section 92A(2)(c), if a loan
advanced by one enterprise to the other enterprise constitutes not less than 51% of the book
value of total assets of the other enterprise. Since Vihaan Ltd., an Indian company, advanced
loan of an amount of ₹ 6 crores to Yuvan Inc., a Singapore company, which is 150% of the book
value of the total assets of Yuvan Inc. (i.e., 150% of ₹ 4 crores), Vihaan Ltd. and Yuvan Inc. are
deemed to be associated enterprises.
(2) Vihaan Ltd. sells equipments at the rate of ₹ 9,000 per unit to Y Ltd. and at ₹ 9,500 per unit to X
LLP, both of them being unrelated parties. Since the transactions can be considered as
comparable uncontrolled transactions for the purpose of determining the arm’s length price,
Comparable Uncontrolled Price (CUP) method would be most appropriate method.
Since two prices are determined by the most appropriate method, and data set comprises of
only two entries, the arm's length price shall be the arithmetical mean of both the values
included in the dataset.
BY CA ATUL AGARWAL (AIR-
1)
Page 1.3
, DT Additional Questions for Practice - Dec 21
Accordingly, arm’s length price would be ₹ 9,250 [(₹ 9,000 + ₹ 9,500)/2]. Since the deviation
between the arm’s length price and actual sale price of the equipment to Yuvan Inc. i.e., ₹ 7,400
per unit is 25%, which exceeds 3% of the price of the international transaction, the arm’s
length price would be ₹ 9,250 per unit and the total income would increase by ₹ 3.7 crores [i.e.
₹ 1,850 (₹ 9,250 – ₹ 7,400) x 20,000 units]
(3) On account of the primary adjustment of ₹ 3.7 crores ( ₹ 1850 x 20,000 units) made by the
Assessing Officer, in the total income of Vihaan Ltd. for A.Y.2021-22, secondary adjustment has
to be made under section 92CE, since –
(1) The company has accepted the primary adjustment made by the Assessing Officer;
(2) The primary adjustment is in respect of A.Y.2021-22; and
(3) The primary adjustment exceeds ₹ 100 lakhs.
Accordingly, the excess money i.e.,3.7 crores available with the Yuvan Inc. has to be repatriated
to India within 90 days of the date of the order of the Assessing Officer.
Alternatively, Vihaan Ltd. can opt to pay additional income-tax @20.9664% (tax @18% plus
surcharge @12% plus cess@4%) on ₹ 3.7 crores, which amounts to ₹ 77,57,568.
Question 4
Horizon Ltd., Russia holds 35% shares in Identiqa Ltd., India. Identiqa Ltd. develops software and
does both onsite and offsite consultancy services for the customers. Identiqa Ltd. during the year
billed Horizon Ltd. Russia for 120 man-hours at the rate of ₹ 1,800 per man hour. The total cost
(direct and indirect) for executing this work amounted to ₹ 2,25,000.
However, Identiqa Ltd. billed Sundy Ltd., India at the rate of ₹ 2,800 per man hour for the similar
level of manpower and earned a Gross Profit of 50% on its cost.
The transactions of Identiqa Ltd. with Horizon Ltd. and Sundy Ltd. are comparable, subject to the
following differences:
• While Identiqa Ltd. derives technology support from the Horizon Ltd., there is no such support
from Sundy Ltd. The value of technology support received from Horizon Ltd. may be put at 18%
of normal gross profits.
• As Horizon Ltd. gives business in large volumes, Identiqa Ltd. offered to Horizon Ltd., a quantity
discount which may be valued at 10% of normal gross profits.
• In the case of rendering services to Horizon ltd., Identiqa Ltd. neither runs any risk nor incurs
any marketing costs. On the other hand, in the case of services to Sundy Ltd., Identiqa Ltd. has to
assume all the risk and costs associated with the marketing function which may be estimated at
12% of the normal gross profits.
• Identiqa Ltd. offered one month credit to Horizon Ltd. The cost of providing such credit may be
valued at 2% of the gross profits. No such credit was given to Sundy Ltd.
Compute the Arm's Length Price alongwith income to be increased under the Cost plus Method with
reference to Section 92C read with Rule 10B.
Answer
Identiqa Ltd, an Indian company and Horizon Ltd., a Russian company, are deemed to associated
enterprises as per section 92A(2), since Horizon Ltd. holds shares carrying 35% of the voting power
(i.e., not less than 26% of voting power) in Identiqa Ltd. Further, the transaction of developing
software and providing consultancy services (both onsite and offsite) fall within the meaning of
BY CA ATUL AGARWAL (AIR-
1)
Page 1.4
Additional Questions for Practice - Dec 2021 Exams
Transfer Pricing
Question 1
Examine whether transfer pricing provisions under the Income-tax Act, 1961 would be attracted in
respect of the following cases -
(i) Transfer of process patents by Rho Ltd., an Indian company, to ABC Inc., a US company, which
guarantees 12% of the borrowings of Rho Ltd.
(ii) Marketing management services provided by Athena, a Greece company to Alpha Ltd., an
Indian company. Athena is a “specified foreign company” as defined in section 115BBD, in
relation to Alpha Ltd.
(iii) Gamma Ltd., an Indian company, has two units, Delta & Phi. Unit Delta, which commenced
business four years back, is engaged in the development of a highway project, for which
purpose an agreement has been entered into with the Central Government. Unit Phi is carrying
on the business of trading in steel. Unit Phi transfers 25,000 metric tons of steel of the value of
₹ 30,000 per MT to Unit Delta for ₹ 20,000 per MT.
(iv) Purchase of machinery by Beta Ltd., an Indian company, from Huff AG, a German company.
Beta Ltd. is the subsidiary of Huff AG.
Answer
(i) The scope of the term “intangible property” includes, inter alia, process patents, which is a
technology related intangible asset. Transfer of intangible property falls within the scope of the
term “international transaction”. Since ABC Inc., a US company, guarantees not less than 10%
of the borrowings of Rho Ltd., an Indian company, ABC Inc. and Rho Ltd. are deemed to be
associated enterprises under section 92A(2). Therefore, since transfer of process patents by
Rho Ltd., an Indian company, to ABC Inc., a US company, is an international transaction
between associated enterprises, the provisions of transfer pricing are attracted in this case.
(ii) Clause (i) of Explanation to section 92B amplifies the scope of the term “international
transaction”. According to the said Explanation, international transaction includes, inter alia,
provision of marketing management services. Athena is a specified foreign company in relation
to Alpha Ltd. Therefore, the condition of Alpha Ltd. holding shares carrying not less than 26%
of the voting power in Athena is satisfied, assuming that all shares carry equal voting rights.
Hence, Athena and Alpha Ltd. are deemed to be associated enterprises under section 92A(2).
Since the provision of marketing management services by Alpha Ltd. to Athena is an
“international transaction” between associated enterprises, transfer pricing provisions are
attracted in this case.
(iii) Unit Delta is eligible for deduction@100% of the profits derived from its eligible business (i.e.,
the business of developing an infrastructure facility, namely, a highway project in this case)
under section 80-IA. However, Unit Phi is not engaged in any “eligible business”. Since Unit Phi
has transferred steel to Unit Delta at a price lower than the fair market value, it is an inter-unit
transfer of goods between eligible business and other business, where the consideration for
transfer does not correspond with the market value of goods. Therefore, this transaction would
fall within the meaning of “specified domestic transaction” to attract transfer pricing
provisions, since the aggregate value of such transactions during the year exceeds a sum of ₹
20 crore.
BY CA ATUL AGARWAL (AIR-1)
AIR1CA Career Institute (ACI)
Page 1.1
, DT Additional Questions for Practice - Dec 21
(iv) Purchase of tangible property falls within the scope of “international transaction”. Tangible
property includes machinery. Huff AG and Beta Ltd. are associated enterprises under section
92A, since Huff AG is a holding company of Beta Ltd. Therefore, purchase of machinery by Beta
Ltd., an Indian company, from Huff AG, a German company, is an international transaction
between associated enterprises, and consequently, the provisions of transfer pricing are
attracted in this case.
Question 2
Delta Ltd., an Indian company, declared total income of ₹ 2,100 crores computed in accordance with
Chapter IV-D before making primary adjustment, if required, in respect of the loan transaction with
Alps Inc, a Swiss company, for the year ended 31.03.2021. Alps Inc. had advanced a loan of Euro 350
crores carrying interest@9% p.a. on 1.4.2020 to Delta Ltd. The total book value of assets of Delta Ltd.
was ₹ 60,000 crores. Assume that the amount of interest computed@9% p.a. and payable to Alps Inc.
does not exceed 30% of EBITDA and that this is the only loan taken by Delta Ltd.
Alps Inc also advanced a loan of similar nature and amount to Beta Ltd., another Indian
company@7% p.a. during the F.Y. 2020-21. The value of 1 Euro may be taken as ₹ 88. You are
required to:
(i) Examine whether transfer pricing provisions under the Income-tax Act, 1961 would be
attracted in this case and if so, on what basis.
(ii) Advise Delta Ltd. regarding primary adjustments, if any, to be made to the above income
keeping in mind the transfer pricing provisions contained in the Income-tax Act, 1961 and
compute the total income for A.Y.2021-22.
(iii) Elaborate on secondary adjustments, if any, required to be made under the provisions of
Income-tax Act, 1961, assuming that Delta Ltd. has made the primary adjustment suo moto.
(iv) Calculate the additional income-tax liability, if Delta Ltd. opts for payment of additional
income-tax in lieu of making secondary adjustment.
Answer
(i) Delta Ltd., an Indian company and Alps Inc, a Swiss company are deemed to be associated
enterprises since the latter has advanced a loan to the former which constitutes 51.33% of the
book value of total assets of the former [Euro 350 crores x ₹ 88/Rs.60,000 crores]. Since the
loan advanced by Alps Inc is not less than 51% of the book value of the total assets of Delta
Ltd., the two companies are deemed to be associated enterprises.
A loan transaction between two enterprises, one of whom is a non-resident (Alps Inc,
Switzerland, in this case), would be an international transaction. Accordingly, transfer pricing
provisions would be attracted in this case.
(ii) The interest rate charged by Alps Inc. on loan advanced to Delta Ltd. is 9% p.a. whereas the
arm’s length interest charged by Alps Inc. in a comparable uncontrolled transaction with Beta
Ltd., another Indian company, is 7% p.a. Therefore, the arm’s length adjustment (primary
adjustment) to be made is = 9% - 7% = 2% of ₹ 30,800 crores (Euro 350 crores x ₹ 88, being
the value of 1 Euro) = ₹ 616 crores
The total income (after primary adjustment) of Delta Ltd for P.Y.2020-21 = ₹ 2,100 crores +
primary adjustment of ₹ 616 crores = ₹ 2,716 crores.
(iii) Since the primary adjustment has been made by Delta Ltd. suo moto while filing its return of
income for A.Y.2021-22, Delta Ltd. has to carry out secondary adjustment in the following
BY CA ATUL AGARWAL (AIR-
1)
Page 1.2
, DT Additional Questions for Practice - Dec 21
manner.
The excess money (i.e., ₹ 616 crores) lying with Alps Inc has to be repatriated within 90 days
from 30.11.2021, being the due date for filing return of income.
If the excess money is not repatriated on or before 28th February, 2022, it would be deemed as
an advance made by Delta Ltd. to Alps Inc and interest would be chargeable from 30.11.2021 at
six month LIBOR as on 30th September, 2021 + 3%, since the loan is denominated in Euros.
Such interest for the period from 30.11.2021 to 31.3.2022 (assuming that it has not been
repatriated upto 31.3.2022) would be included in the total income of Delta Ltd. for P.Y.2021-
22.
(iv) If Delta Ltd. opts for payment of additional income-tax, it has to pay ₹ 129.153 crores [i.e.,
20.9664% (tax@18% + surcharge@12% + cess@4%) of ₹ 616 crores].
Question 3
On 1-4-2020, Vihaan Ltd., an Indian company, advanced a loan of ₹ 6 crores to Yuvan Inc., a company
resident in Singapore. As on the date of loan, the book value of total assets in the books of Yuvan Inc.
was ₹ 4 crores. In the Financial Year 2019-20, Yuvan Inc. had revalued its assets and accordingly the
value of assets had increased by ₹ 2 crores. Yuvan Ltd. paid the entire loan along with interest
thereon on 31st August, 2020. During the Financial Year 2020-21, Vihann Ltd. also entered into an
agreement with Yuvan Inc. to provide 20 thousand medical equipments at a cost of ₹ 7,400 per unit.
The Assessing Officer treats them as associate enterprise and wants to re-compute the income of
Vihaan Ltd. at arms’ length price. You are required to answer the following questions in this respect:
(1) Would Vihaan Ltd. and Yuvan Ltd. be treated as associate enterprises for the purpose of
transfer pricing adopted by the Assessing Officer? If yes, why? '.
(2) Calculate the arm’s length price of Vihaan Ltd. which sells the same equipments at the rate of ₹
9,000 per unit to Y Ltd. and at the rate of ₹ 9,500 per unit to X LLP (both of them are unrelated
parties in respect of Vihaan Ltd.). Vihaan Ltd. is not a wholesale dealer.
(3) What are the options available to Vihaan Ltd. in respect of such increase in transfer price by
income tax authorities, if Vihaan Ltd. accepts such transfer price?
Answer
(1) Two enterprises are deemed to be associated enterprises as per section 92A(2)(c), if a loan
advanced by one enterprise to the other enterprise constitutes not less than 51% of the book
value of total assets of the other enterprise. Since Vihaan Ltd., an Indian company, advanced
loan of an amount of ₹ 6 crores to Yuvan Inc., a Singapore company, which is 150% of the book
value of the total assets of Yuvan Inc. (i.e., 150% of ₹ 4 crores), Vihaan Ltd. and Yuvan Inc. are
deemed to be associated enterprises.
(2) Vihaan Ltd. sells equipments at the rate of ₹ 9,000 per unit to Y Ltd. and at ₹ 9,500 per unit to X
LLP, both of them being unrelated parties. Since the transactions can be considered as
comparable uncontrolled transactions for the purpose of determining the arm’s length price,
Comparable Uncontrolled Price (CUP) method would be most appropriate method.
Since two prices are determined by the most appropriate method, and data set comprises of
only two entries, the arm's length price shall be the arithmetical mean of both the values
included in the dataset.
BY CA ATUL AGARWAL (AIR-
1)
Page 1.3
, DT Additional Questions for Practice - Dec 21
Accordingly, arm’s length price would be ₹ 9,250 [(₹ 9,000 + ₹ 9,500)/2]. Since the deviation
between the arm’s length price and actual sale price of the equipment to Yuvan Inc. i.e., ₹ 7,400
per unit is 25%, which exceeds 3% of the price of the international transaction, the arm’s
length price would be ₹ 9,250 per unit and the total income would increase by ₹ 3.7 crores [i.e.
₹ 1,850 (₹ 9,250 – ₹ 7,400) x 20,000 units]
(3) On account of the primary adjustment of ₹ 3.7 crores ( ₹ 1850 x 20,000 units) made by the
Assessing Officer, in the total income of Vihaan Ltd. for A.Y.2021-22, secondary adjustment has
to be made under section 92CE, since –
(1) The company has accepted the primary adjustment made by the Assessing Officer;
(2) The primary adjustment is in respect of A.Y.2021-22; and
(3) The primary adjustment exceeds ₹ 100 lakhs.
Accordingly, the excess money i.e.,3.7 crores available with the Yuvan Inc. has to be repatriated
to India within 90 days of the date of the order of the Assessing Officer.
Alternatively, Vihaan Ltd. can opt to pay additional income-tax @20.9664% (tax @18% plus
surcharge @12% plus cess@4%) on ₹ 3.7 crores, which amounts to ₹ 77,57,568.
Question 4
Horizon Ltd., Russia holds 35% shares in Identiqa Ltd., India. Identiqa Ltd. develops software and
does both onsite and offsite consultancy services for the customers. Identiqa Ltd. during the year
billed Horizon Ltd. Russia for 120 man-hours at the rate of ₹ 1,800 per man hour. The total cost
(direct and indirect) for executing this work amounted to ₹ 2,25,000.
However, Identiqa Ltd. billed Sundy Ltd., India at the rate of ₹ 2,800 per man hour for the similar
level of manpower and earned a Gross Profit of 50% on its cost.
The transactions of Identiqa Ltd. with Horizon Ltd. and Sundy Ltd. are comparable, subject to the
following differences:
• While Identiqa Ltd. derives technology support from the Horizon Ltd., there is no such support
from Sundy Ltd. The value of technology support received from Horizon Ltd. may be put at 18%
of normal gross profits.
• As Horizon Ltd. gives business in large volumes, Identiqa Ltd. offered to Horizon Ltd., a quantity
discount which may be valued at 10% of normal gross profits.
• In the case of rendering services to Horizon ltd., Identiqa Ltd. neither runs any risk nor incurs
any marketing costs. On the other hand, in the case of services to Sundy Ltd., Identiqa Ltd. has to
assume all the risk and costs associated with the marketing function which may be estimated at
12% of the normal gross profits.
• Identiqa Ltd. offered one month credit to Horizon Ltd. The cost of providing such credit may be
valued at 2% of the gross profits. No such credit was given to Sundy Ltd.
Compute the Arm's Length Price alongwith income to be increased under the Cost plus Method with
reference to Section 92C read with Rule 10B.
Answer
Identiqa Ltd, an Indian company and Horizon Ltd., a Russian company, are deemed to associated
enterprises as per section 92A(2), since Horizon Ltd. holds shares carrying 35% of the voting power
(i.e., not less than 26% of voting power) in Identiqa Ltd. Further, the transaction of developing
software and providing consultancy services (both onsite and offsite) fall within the meaning of
BY CA ATUL AGARWAL (AIR-
1)
Page 1.4
