Transaction between two branches of same company

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

18 April 2014 Is it allowed to charge profit/ margin on the cost during providing service by one department to other department of the same company at same place under the same management and at same establishment with having same registration/ license/ PAN/TAN ? Example : XYZ Ltd has two departments A & B . If 'A' provide manpower services to 'B' at a cost of Rs. 10,000 then is it allowed to charge profit of 10% and debit Rs.11,000/- to 'A' and book profit of Rs. 1000 in the books of 'A' . However at the time of consolidation of accounts of XYZ Ltd this Income will be nullified and net profit will be Nil as a whole for XYZ Ltd on account of these entries. However there will be income for XYZ Ltd from its main activities / business. Is there any problem if Income is credited in the books of 'A' and later on same amount of Income is Debited and same head of expenditure is credited in the books of XYZ Ltd at the time of consolidation. If it is not allowed to Credit Income under one department's account and Debit Income in main account then please give reference of the rule/ guidance etc. These entries will help in generating profit for one department and for the company as a whole there will be no profit due to these intra departmental service and no Income Tax will be payable by XYZ Ltd on this account after consolidation . Ultimately actual expenditures will be shown in the consolidated account. Is it allowed ?

Rupesh Jain

Rupesh Jain (Expert)
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18 April 2014 there will be service tax provision in which if you use inter unit use of any facility then you have to charges 10% profit on cost .

and then you are paying service tax on rs. 11000/-

it is for service tax purpose only.

it is correct that under one company branch take profit and on consolidation .
there is no effect on company profit.

in every big co. normal practice is same as you are doing. and this is actual accounting practice.

CA Umesh kumar Mantri

CA Umesh kumar Mantri (Expert)
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18 April 2014 If one Party suppose A purchase goods from A and using Such goods mfg a finished goods and again supply to A.

So in the above case A is required to deduct TDS.

IF yes ..is it cover in 194C
Please tell me about the circular also which is issued by CBDT.

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Nikhil Kaushik

Nikhil Kaushik (Expert)
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18 April 2014 there is no issue at all in this process. there are no tds, service tax etc liabilities.

CA Umesh kumar Mantri

CA Umesh kumar Mantri (Expert)
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19 April 2014 Thanks for reply
But I think its cover in Section 194 C of Income tax Act.

So our Co. Dec duct the TDS 2% at Such of Transactions

Querist : Anonymous

Querist : Anonymous (Querist)

19 April 2014 On above there is answer by expert that there will be no issue . I understand it is not a matter of transfer pricing as one department charges profit by providing services to other department in the same company , under same roof. I want to ask the experts whether it is possible that if HR Department of a company gives salary of Rs 10000/- to an employee and depute him to other department and charges Rs 11, 000/- and credit Income of Rs.11000/- and book profit of Rs 1000/- on this account in HR department . Later on at the time of consolidation of Company Account ,Accounts Department of Head office reverses the Income booked earlier by Debiting Income of Rs. 11000/- passing a new entry . Is it allowed to pass such entry in its book where entry of Income should come only from its actual business , not by debiting salary with a margin ( as it is not actual income for the company or its branch ). If such entry of Income is passed will it be objectionable by Auditors or by Tax authorities? Is it allowed to show such income which will be reversed at the time of consolidation ? It is not a case of rectification of entries later on , neither it is a case of transfer pricing. I am talking about accounting entries only. It is done just to show whether HR Department is running in loss or profit . If it is allowed then Service tax on the gross amount & TDS will be charged or not ? Some experts commented there will be TDS & Service Tax. I request all experts including Mr Nikhil Kaushik to reply.