Pristine Cement Industries Ltd. (PCIL) is an Indian company, having its head office at Chennai. For the P.Y. 2024-25, it furnished the following…

Any income arising from an international transaction, between two or more "associated enterprises”, shall be computed having regard to arm's length price as per the provisions of Chapter X of the Act. Section 92A defines an "associated enterprise" and sub-section (2) of this section speaks of the situations when the two enterprises shall be deemed to be associated enterprises. Transaction with Sakura Industries Ltd. Sakura Industries Ltd. is a wholly owned subsidiary of PCIL and is a non-resident company. Hence, it is an associated enterprise. Royalty falls within the meaning of international transaction, since it is payment for supply of know-how, being an intangible property. Sakura Industries Ltd. is currently paying a royalty of USD 3 million per annum to PCIL for supply of know-how. For similar supply of know how to Hikari Ltd., a wholly owned Government Company in Japan, PCIL receives annual royalty of USD 4 million. Under CUP Method, ALP has to be taken as USD 4 million. Understatement of royalty is 1 million USD, i.e., 1 M USD x 82 = 820 lakhs. Transaction with Orion Capital Inc. As per section 92A (2) , if one enterprise advances loan to the other enterprise of an amount of 51% or more of the book value of the total assets of such other enterprise, the two enterprises would be deemed to be associated enterprises. As on the date of borrowing, the amount advanced is 220crores out of 330crores, which comes to 66.67%. Hence, Orion Capital Inc., is deemed to be an associated enterprise of PCIL. Interest payments are also covered by the term "international transaction". Orion Capital Inc., has charged interest at 8% and PCIL has paid interest of 17.6 crores for the year ended 31.3.2025. Interest rate charged to other parties is 7%. This has to be taken as the ALP rate. In view of this, the interest payment should have been 17.6 x 7/8 i.e.,15.4 crores. An excess payment of 2.2 crores over the ALP has been made. Transaction with PBC In PBC, PCIL holds 22/92 i.e., 23.91% of the voting power. Since PCIL holds less than 26% of the voting power, PBC is not an associated enterprise. Hence, the transfer pricing provisions would not be applicable on sales made by PCIL to PBC.