STP Ltd. is an Indian company engaged in the manufacturing of supreme quality cotton bedsheets. It has total borrowings of 60 crores by way of loan…

CA Final · Direct Tax Laws and International Taxation · MTP · November 2024
STP Ltd. is an Indian company engaged in the manufacturing of supreme quality cotton bedsheets. It has total borrowings of 60 crores by way of loan as on 1.04.2023. Fix Ltd. of Canada imported 4 lakh bedsheets from STP Ltd. for the resale in Canada @2,200 per unit. STP Ltd. sold similar bedsheets to other dealers in Canada @2,300 per unit. STP Ltd. received a bank guarantee on 1.04.2023 for availing a cash credit limit of 9 crores for which Fix Ltd. was the guarantor. The terms of trade for other dealers was to make payment within 1 month from the date of sale of goods by STP Ltd., whereas for Fix Ltd., the credit period allowed was 3 months from the date of sale of goods. The cost of capital was 12% per annum and the supply of goods is assumed to be uniform throughout the year. You are required to determine whether STP Ltd. and Fix Ltd. are associated enterprises. If yes, compute the ALP of the transaction between them and the amount to be added to the income of STP Ltd., if any, by way of an ALP adjustment. Assuming that the above adjustments to the transfer price have been made suo-moto by STP Ltd. in its return of income, what is the time limit for the repatriation of such excess money? What are the implications if the excess money is not repatriated within such prescribed time limit?

Suggested Answer and Working Notes:

(1) STP Ltd. and Fix Ltd. of Canada are deemed to be associated enterprises, since Fix Ltd., a Canadian company provides guarantee for loan of 9crores taken by STP Ltd., which is 15% of the total borrowings (i.e., not less than 10%) of STP Ltd. i.e.,60 crores. As per section 92B, the transactions entered into between STP Ltd. and Fix Ltd., two associate enterprises, for sale of bedsheets falls within the meaning of “international transaction”. As STP Ltd. has sold similar bedsheets to other dealers, being unrelated entity, at 2,300 per unit, the transactions between STP Ltd. and such unrelated party can be considered as a comparable uncontrolled transaction for the purpose of determining the arm's length price of the transactions between STP Ltd. and Fix Ltd. However, such figure needs to be adjusted by the functional adjustments. Computation of ALP of transaction between STP Ltd. and Fix Ltd. Particulars Amount (in ₹) Selling price of each bedsheets to unrelated dealers in Canada 2,300 Add: Adjustment of cost of credit [STP Ltd. provides credit for 1 month to unrelated entity whereas it provided credit period of 3 months to Fix Ltd. Therefore, adjustment for the cost of such credit has to be carried out to arrive at arm's length price. (12% x 2,300 x 2/12)] 46 Arm's length price of 1 unit of bedsheets 2,346 Arm's length price of 4 lakh units of bedsheets (A) 93,84,00,000 Sale price of 4 lakh units of bedsheets by STP Ltd. to Fix Ltd. (associated enterprise) (B) [2,200 x 4,00,000] 88,00,00,000 Amount to be added to STP Ltd.'s total income by way of ALP adjustment 5,84,00,000 (2) Where the primary adjustment to transfer price has been made suo moto by STP Ltd. in its return of income, the time limit for the repatriation of such excess money (i.e.,584 lakhs) available with the associated enterprise (i.e., STP Ltd.) is within 90 days from 30.11.2024, being the due date of filing of return u/s 139(1) i.e., 28.2.2025. (3) The excess money (i.e.,584 lakhs) available with the associated enterprise (i.e., Fix Ltd.) not repatriated to India within 90 days from the due date of filing return of income u/s 139(1) would be deemed as an advance made by the STP Ltd. to its associated enterprise, Fix Ltd. Interest would be calculated on such advance at the rate of one year marginal cost of fund lending rate of SBI as on 1st April of the relevant previous year i.e., 1.4.2024 + 3.25%, since the international transaction is denominated in Indian rupee. Option to pay additional income-tax, if the excess money not repatriated STP Ltd. has the option to pay additional income-tax @20.9664% (tax @18% plus surcharge @12% plus cess@4%) on excess money (i.e.,584 lakhs), in lieu of repatriation of such excess money. Where additional income-tax is so paid by STP Ltd., it will not be required to make secondary adjustment and compute interest from the date of payment of such tax. The additional income-tax so paid by STP Ltd. would be treated as the final payment of tax in respect of excess money not repatriated and no further credit would be allowed to STP Ltd. or to any other person in respect of the amount of additional income-tax so paid.

Topics: Transfer Pricing

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