Indiana Ltd., an Indian company engaged in the manufacturing and trading of electronic projectors. Indiana Ltd. has the following stakes in…

CA Final · Direct Tax Laws and International Taxation · PYQS · May 2025
Indiana Ltd., an Indian company engaged in the manufacturing and trading of electronic projectors. Indiana Ltd. has the following stakes in different foreign entities: It holds 30% voting rights in Star GmbH, a German company.It appoints 6 directors in Moon Inc., an American company. Moon Inc. has 15 directors on its board.It has given guarantee for a loan amounting to Euro 12 million taken by Astroid Ltd. of the UK. The value of total borrowing of Astroid Ltd. is Euro 150 million and the book value of total assets of Astroid Ltd. is Euro 160 million. Indiana Ltd. entered into the following transactions with these entities during the F.Y. 2024-25: Transaction with Star GmbH Indiana Ltd. bought 1,000 units of electronic projectors from Star GmbH for 15,000 per unit for the purpose of resale in India. It sold these projectors in India without doing any modification thereon. The gross profit margin earned from such resale was 20% of Sale price. Star GmbH provided after-sales warrantee of 1 year. The cost of warrantee is 3% of sale price. Transaction with Moon Inc. Indiana Ltd. bought 1,000 units of similar electronic projectors (as purchased from Star GmbH) from Moon Inc. for 14,000 per unit for the purpose of resale in India. It sold these projectors in India without doing any modification and earned gross profit margin of 30% of sale price. Moon Inc. provided after-sales warrantee of 9 months. The cost of warrantee is 3% of sale price. Transaction with Astroid Ltd. Indian Ltd. provided consultancy services to Astroid Ltd. for 8,000 per hour for 5,000 hours. It provided similar services to M/s Comet Ltd., an unrelated Indian company for 9000 per hour. You are required to discuss: (i) Whether Star GmbH, Moon Inc. and Astroid Ltd. are associated enterprises/deemed associated enterprises of Indiana Ltd. as per section 92A of the Act. (ii) Compute the Arm Length Price (ALP) of the international transactions made between them, wherever applicable.

Suggested Answer and Working Notes:

(i) Indiana Ltd., an Indian company and Star GmbH, a German company are deemed to be associated enterprises as per section 92A(2), since Indiana Ltd. holds more than 26% of voting power i.e., 30% in Star GmbH. Indiana Ltd. and Moon Inc., an American company are not deemed to be associated enterprises as per section 92A(2), since Indiana Ltd. appoints less than half of the directors of Moon Inc. i.e., only 6 out of 15 directors. Indiana Ltd. and Astroid Ltd., UK are not deemed to be associated enterprises as per section 92A(2), since Indiana Ltd. guarantees less than 10% i.e., 8%, in this case (Euro 12 million/ Euro 150 million) of the total borrowing of Astroid Ltd. (ii) The transaction of purchasing electronic projectors from Star GmbH falls within the meaning of "international transaction”. Hence, transfer pricing provisions would be attracted in this case. Indiana Ltd. purchases similar electronic projectors from Moon Inc., the transaction would be uncontrolled transaction. Computation of Arm's length price ₹ Resale price of electronic projectors purchased from Star GmbH [(₹ 15,000 + 20/80 of 15,000) x 1,000 unit] 1,87,50,000 Less: Profit margin with reference to uncontrolled transaction between Indiana Ltd. and Moon Inc. [30% on sale price] 56,25,000 1,31,25,000 Add: Cost of warranty [Star GmbH provides warranty for 1 year whereas Moon Inc. has provided warranty of 9 months. Therefore, adjustment for the cost of such warranty has to be carried out for 3 months @3% of sales price. [₹ 1,87,50,000 x 3% x 3/12]] 1,40,625 Arm's length price 1,32,65,625

Topics: Transfer Pricing

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