Auditing Services When two or more associated companies enter into a mutual contract during an international transaction in order to apportion a particular cost incurred in relation with a benefit, service or facility offered by any one or all of the companies, such a cost shall be calculated considering the arm's length price of the particular benefit, service, or facility, as applicable.
According to sections 92, 92A, 92B, 92C, 92D, 92E and 92F, a company can be termed as an associated enterprise with respect to the other under the following circumstances.
If the respective company is involved directly or indirectly or with the help of one or more intermediaries in the management, control, or the capital of the other company.
If any person/persons of the respective company who is/are involved directly or indirectly or with the help of one or more intermediaries in the management, control, or the capital of one company is/are involved directly or indirectly or with the help of one or more intermediaries in the management, control, or the capital of the other company.
A. An international Transaction is defined as any transaction between two or more associated companies situated in different countries in terms of a property that is tangible or intangible, a service offered by the company, or any form of lending of money, etc. It is compulsory that at least one of the participants involved in the transaction is a non-resident of India. However, a transaction that has been carried out by two non-resident Indians, where one of them possesses a permanent setup in India and whose income is taxable from India, such a type of transaction is also considered as 'International Transaction.'
Transactional net margin procedure
Any person who has involved in an international transaction in the previous year shall submit the report in Form 3CEB through a Chartered Accountant, duly verified by him, on or before the date prescribed by the authority, furnishing all the required details. Appropriate method- Can there be more than one?
Since what is chosen is the "most appropriate method", the concept of more than one appropriate price is a self-contradiction. But the proviso to section 92C(2) reads as under: "Provided that where more than one price may be determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such price." The above proviso indicates that in the most appropriate method, which was chosen, there could be more than one price in which case the arithmetical mean will be taken. In other words, there could be more than one comparable and uncontrollable price, so that average could be adopted. Similarly, there could be more than one resale price or one cost plus price, so that the average can be adopted. The law does not, however contemplate more than one most appropriate method. Transfer pricing only when there is tax relevance
An international transaction is one which takes place between a resident and a non resident or between two residents with a non resident associated concern as an intermediary. There is bound to be a tax impact for one or the other,so that transfer pricing become relevant , if not for the non- resident but atleast for the resident associate. Transfer pricing is bound to be relevant in such cases. It stands to reason, when the transfer pricing has no relevance at all for either party to the transaction, the rules would have no application, because the requirement of ascertainment of transfer pricing would not arise in such a case.
Associate concern –Duration of association
Transfer pricing rules relate to transactions. It is therefore reasonable to presume that the transaction covered in the last quarter of the previous year alone could be covered. There is possible view, that since it is an associate concern at any time during the year, all the transactions for the year are covered. The definition of “associated enterprise” in section 92A(2) would indicate, that an enterprise becomes an associate enterprise , if it becomes so “at any time during the previous year”. It would, therefore, mean that the associate enterprise is an associate enterprise for the whole year, so that the transaction for the period for which it was not associate enterprise may also be covered. This would, however, be a less plausible interpretation.
Related party transaction v Associated Enterprise
Ind AS 24 would understand a related party transaction as a transfer of resources or obligation between related parties regardless of whether or not the price is charged. It would, therefore, appear that accounting standard 24 is even more plain and clear in comprehending a gift as one, which is covered by the transfer pricing rules, because a gift can be understood as transaction for which no price is charged. The Indian Accounting Standard 24 is styled “Related party disclosures” .The objectives is to make available relevant information in the financial statements in respect of accounting periods commencing from 1.4.2001, since it has become mandatory from that date. It is not applicable for intra- group transactions but it is applicable for related parties not forming part of intra- group either . Direct inter-party relationship or indirectly through controlled enterprise may come in for disclosure in the context of transaction between them. The concept of key management underlies the concept of control. Though key management is central to both the accounting standards and the transfer pricing rules, Ind AS 18 is more concerned with the disclosure of the transaction with a view to ensure transparency, and it is not concerned whether such transaction take place at arm’s length price, but only require information about such transactions to be disclosed. It is intended to help the user to appreciate the financial statements as to its operating results, its true financial position and net worth. It may help a person to understand the credit standing of the enterprise, resources by way of raw material or market, and such other information which may be relevant in judging the standing of the enterprise as a member or group of associated enterprise, since the normal reporting is one as an independent entity. Reports indicating common directors and the associated concerns would complete the required information for judging the standing of an enterprise.