Yalin Ltd. is located in Country X, a notified jurisdictional area (NJA). Armo Ltd., a domestic company (the assessee) sold goods to Yalin Ltd. on…

CA Final · Direct Tax Laws and International Taxation · PYQS · May 2024
Yalin Ltd. is located in Country X, a notified jurisdictional area (NJA). Armo Ltd., a domestic company (the assessee) sold goods to Yalin Ltd. on 15.01.2024 for 11.75 crore. During the current financial year, Armo Ltd. sold identical goods to KB Inc., of Edinburgh, U.K. for 13 crore. KB Inc. is neither situated in any NJA nor it is associated person of Armo Ltd. While sales to KB Inc., were on CIF basis, the sale to Yalin Ltd. was on FOB basis, which paid ocean freight and insurance amounting to 25 Lakhs on purchases from Armo Ltd. India has a double taxation avoidance agreement with UK. The assessee has a policy of providing after sales support service to the tune of 19 lakhs to all customers except Yalin Ltd. which procured the same locally at a cost of 23 lakhs. Whether Yalin Ltd. and Armo Ltd. are Associated Enterprises. If yes, compute the Arm's Length Price for the sales made to Yalin Ltd. and the amount of consequent adjustment, if any, in the profits of Armo Ltd., the assessee company for A.Y. 2024-25. Explain with reasons.

Suggested Answer and Working Notes:

Since Armo Ltd. entered into a transaction with Yalin Ltd., in Country X which is located in a notified jurisdictional area (NJA), Armo Ltd. and Yalin Ltd. would be deemed as associated enterprises and the transactions between them would be deemed to be international transactions. Accordingly, all the provisions of transfer pricing would be attracted in case of such a transaction. The transactions of Armo Ltd. with KB Inc., U.K. for sale of identical goods are comparable uncontrolled international transactions, since it is neither associated enterprises of Armo Ltd. nor it is situated in NJA. Hence, Comparable Uncontrolled Price (CUP) method can be used to determine ALP. Computation of ALP using CUP method Particulars ₹ in crores Price charged by KB Inc. (on CIF basis) 13.00 Less: Ocean freight and insurance, has to be reduced since the price charged to Yalin Ltd. is on FOB basis 0.25 Less: Cost of after-sales support service (has to be reduced, since such services are being provided to KB Inc. but not to Yalin Ltd.) 0.19 Arm's Length Price 12.56 Less: Price at which goods were sold to Yalin Ltd. 11.75 Arm's length adjustment [increase in profit of Armo Ltd.] 0.81

Topics: Transfer Pricing

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