TI Ltd., the assessee, has sold goods on 12.01.2024 to LMP Ltd., located in notified jurisdictional area (NJA), for 9.50 crores. During the current…

CA Final · Direct Tax Laws and International Taxation · MTP · November 2024
TI Ltd., the assessee, has sold goods on 12.01.2024 to LMP Ltd., located in notified jurisdictional area (NJA), for 9.50 crores. During the current financial year, TI Ltd. charged - 10.50 crores from TOP Inc. of Country X and 11 crores from MON Inc. of Country Y for sale of identical goods and both of which are neither associated enterprise of TI Ltd. nor they are situated in any NJA. While sales to TOP Inc. and MON Inc. were on CIF basis, the sale to LMP Ltd., was on FOB basis, which paid ocean freight and insurance amounting to 20 lakhs on purchases from TI Ltd. If sales to TOP Inc. and MON Inc. are made on FOB basis, the cost of freight, insurance would amount to 18 lakhs. The assessee has a policy of providing after-sales support service to the tune of 13 lakhs to all customers except LMP Ltd. which procured the same locally at a cost of 17 lakhs. Compute the ALP for the sales made to LMP Ltd., and the amount of consequent increase, if any, in the profit of the assessee-company.

Suggested Answer and Working Notes:

A transaction where one of the parties thereto is a person located in a NJA would be deemed to be an international transaction and all parties to the transaction would be deemed as associated enterprises. Accordingly, all the provisions of transfer pricing would be attracted in case of such a transaction. Hence, the transactions between TI Ltd, an Indian company and LMP Ltd., located in NJA, would be deemed to be international transactions between associated enterprises. The transactions of TI Ltd. with TOP Inc. of Country X and MON Inc. of Country Y for sale of identical goods are comparable uncontrolled international transactions, since they are neither associated enterprises of TI Ltd. nor are they situated in NJA. Hence, Comparable Uncontrolled Price (CUP) method can be used to determine ALP. Where more than one price is determined by the most appropriate method, CUP method in this case, then, the arithmetic mean has to be taken in cases where the number of entries in the dataset is less than 6 (in this case it is only 2). Moreover, the benefit of permissible variation between the ALP and the transfer price based on the rate notified by the Central Government (i.e., maximum of 3% of transaction price) would not be available in respect of such transaction. Computation of ALP using CUP method Particulars TOP Inc. ₹ in crores MON Inc. ₹ in crores Price charged by TI Ltd. (on CIF basis) 10.50 11.00 Less: Ocean freight and insurance, has to be reduced since the price charged to LMP Ltd. is on FOB basis 0.18 0.18 10.32 10.82 Less: Cost of after-sales support service (has to be reduced, since such services are being provided to TOP Inc. and MON Inc. but not to LMP Ltd.) 0.13 0.13 Arm’s Length Price 10.19 10.69 Arithmetic mean of the above prices [(₹ 10.19 crores +10.69 crores)/2] 10.44 Less: Price at which goods were sold to LMP Ltd. 9.50 Arm’s length adjustment [increase in profit of TI Ltd.] 0.94

Topics: Transfer Pricing

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