NeoVentures Ltd., Australia, holds 30% equity shares in Akshaya InfraTech Pvt Ltd., India. Akshaya InfraTech Pvt Ltd. develops software and also…

CA Final · Direct Tax Laws and International Taxation · MTP · September 2025
NeoVentures Ltd., Australia, holds 30% equity shares in Akshaya InfraTech Pvt Ltd., India. Akshaya InfraTech Pvt Ltd. develops software and also provides related support services. Akshaya InfraTech Pvt Ltd. during the year billed NeoVentures Ltd., Australia for 150 man-hours at the rate of 2,700 per man hour. The total cost (direct and indirect) for executing this work amounted to 4,52,000. However, Akshaya InfraTech Pvt Ltd. billed Vedanta Ltd., India at the rate of 3,800 per man hour for the similar level of manpower and earned Gross Profit of 40% on its cost. The transactions of Akshaya InfraTech Pvt Ltd. with NeoVentures Ltd. and Vedanta Ltd. are comparable, subject to the following differences: (i) While Akshaya InfraTech Pvt Ltd. also derives technological support from NeoVentures Ltd., there is no such support from Vedanta Ltd. The value of technological support received from NeoVentures Ltd. may be put at 15% of normal gross profits. (ii) As NeoVentures Ltd. gives business in large volumes, Akshaya InfraTech Pvt Ltd. offered to NeoVentures Ltd., a quantity discount which may be valued at 10% of the normal gross profits. (iii) In the case of rendering services to NeoVentures Ltd., Akshaya InfraTech Pvt Ltd. neither runs any risk nor incurs any marketing costs. On the other hand, in the case of services to Vedanta Ltd., Akshaya InfraTech Pvt Ltd. has to assume all the risks and costs associated with the marketing function which may be estimated at 20% of the normal gross profits. (iv) Akshaya InfraTech Pvt Ltd. offered one month credit to NeoVentures Ltd. The cost of providing such credit may be valued at 5% of the normal gross profits. No such credit was given to Vedanta Ltd. Compute the Arm's Length Price alongwith income to be adjusted under the cost plus method.

Suggested Answer and Working Notes:

Two enterprises are deemed to be associated enterprises where one enterprise, directly or indirectly, holds shares carrying not less than 26% of the voting power in the other enterprise. In this case, since NeoVentures Ltd., a foreign company, holds 30% equity shares in Akshaya InfraTech Pvt Ltd., an Indian company, NeoVentures Ltd. and Akshaya InfraTech Pvt Ltd. are deemed to be associated enterprises. Since the transaction of developing software and providing related support service by Akshaya InfraTech Pvt Ltd. to NeoVentures Ltd. is an international transaction between associated enterprises, the provisions of transfer pricing would be attracted in this case. Computation of Arm's Length Price as per Cost Plus Method Particulars % % Gross Profit mark-up on cost in case of Vedanta Ltd. [an unrelated party] 40% Less: Adjustments for functional and other differences - Value of technology support [NeoVentures Ltd. provides technology support, but Vedanta Ltd. does not provide such support. Therefore, value of technology support shall be adjusted] [15% of 40%, being gross profit] 6% - Quantity discount to NeoVentures Ltd. [Quantity discount is allowed to NeoVentures Ltd. as it gives business in large volumes, but the same is not provided to Vedanta Ltd. Therefore, it shall be adjusted] [10% of 40%, being gross profit] 4% - Risk and cost associated with marketing [Akshaya InfraTech Pvt Ltd. has to bear all the risk and costs associated with the marketing function in case of Vedanta Ltd., while there is no such risk in case of services to NeoVentures Ltd. Therefore, market risk and cost shall be adjusted] [20% of 40%, being gross profit] 8% 18% 22% Add: Cost of credit to NeoVentures Ltd. [Akshaya InfraTech Pvt Ltd has provided credit of 1 month to NeoVentures Ltd. but not to the unrelated party. Therefore, adjustment for the cost of such credit has to be carried out to arrive at the ALP] [(5% of 40%, being gross profit] 2% 24% Arm's length gross profit mark up to cost 24% Cost incurred by Akshaya InfraTech Pvt Ltd. for executing NeoVentures Ltd.'s work 4,52,000 Add: Adjusted gross profit (₹ 4,52,000 x 24%) 1,08,480 Arm's length billed value 5,60,480 Less: Actual Billed Income from NeoVentures Ltd. (₹ 2,700 x 150 man hours) 4,05,000 Total Income of Akshaya InfraTech Pvt Ltd to be increased by 1,55,480

Topics: Transfer Pricing

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