19 June 2013
If an Indian company is providing services to its Associated Enterprise(AE) in USA and the AE is using these services further to complete its contractual obligation to a client based in USA.
The AE adds 4% profit margin to what the Indian company charges from it and provides the service to client at such price.
Will the transfer price on the Indian company be such sale price of service inclusive of 4% profit margin set by AE or without it.
Ex:
Supply price by Indian Co. to AE =Rs. 100
Profit Margin 4% =Rs. 4
Value of service charged =Rs. 104 from client
Will the transfer price for the Indian company be Rs. 100 or Rs. 104?
If in the above case, the Indian company had a direct contract with the client based in USA and the AE was just acting as an intermediary for collecting the revenue from the US client and remitting the balance amount after deducting 5% commission, then what would be the transfer price and will this expense of 5% commission done by the Indian company be allowed as an expense against the revenue earned for Income tax purpose?
The indulgence of AE in this case is due to the Indian company's bank not allowing straight receipt of revenue by the Indian company from the US client.
Ex:
Supply price by Indian Co. to US =Rs. 100 based client
Amount received by AE on behalf of Indian Company =Rs. 100
Commission @ 5% charged by AE and tax duly paid in USA on this amount from client =Rs. 5
Amount remitted to the Indian Co. =Rs. 95 by AE after deducting commission
Will the transfer price for the Indian company be Rs. 100 or Rs. 95.
Will this exp. of Rs. 5 as commission paid be allowed as an expense?
CAclubindia
