04 June 2009
1. Section 92(1) provides that: i. There must be "income arising"; ii. Such income must arise "from" an "international transaction"; iii. Such income "shall" be computed having regard to the "arm’s length price". Allowance for any expenses or interest arising from an international transaction is also to be determined having regard to arm’s length price. Further, the application of arm’s length price results in reducing the chargeable income or increasing the loss from an Indian Income-tax perspective, then the income, expense, interest or other allocation or apportionment of expenses need not be calculated at such arm’s length price. 2. Section 92(2) provides that cost sharing arrangements between "associated enterprises" ("AEs") will also be subject to the arm’s length rule. 3. The term "international transaction" is defined in section 92B. The salient features of this definition are as under : 3.1 Use of word "means" shows that it is an exhaustive definition; 3.2 The term "transaction" is defined in an inclusive manner in section 92F(v); 3.3 The transaction has to be between two or more "associated enterprises" ("AEs"). "Associated enterprise" is defined in section 92A; 3.4 All or any one of the AEs must be a "non-resident". The section states "either or both of whom are non-resident". Section 2(30) defines the term non-resident and for the purposes of section 92 includes a resident but not ordinarily resident. 3.5 The transaction may be in the nature of commercial transaction such as: • Purchase, sale or lease of tangible or intangible property; or • Provision of services; or • Lending or borrowing money; or • Any other transaction having a bearing on profits, income, losses or assets of an AE. • Cost sharing arrangement, that is, a mutual agreement or arrangement between AEs for the allocation or apportionment of, or contribution to any cost or expense incurred in connection with a "benefit, service or facility" provided to the AE. 4. Section 92B(2) deems a transaction between two unrelated enterprises to be an international transaction between two associated enterprises under certain circumstances 5. The term "arm’s length price" is defined in section 92F(ii) to mean— • The price which is applied, or • Is proposed to be applied • In a transaction between persons other than AEs • In uncontrolled conditions. 6. Section 92C provides the mechanism of determining the "arm’s length" price by any of the following five methods, being the most appropriate method taking into consideration the nature or class of the transaction functions performed or such other factors as laid down in rule 10B,: a. comparable uncontrolled price method; • Comparison of price charged or paid for property transferred or services provided in a comparable uncontrolled transaction. • Used mainly in respect of transfer of goods, provision of services, intangibles, loans, provision of finance. b. resale-price method; • Considers the price at which property purchased or services obtained by the enterprise from an AE is resold or are provided to an unrelated enterprise. • Used mainly in case of distribution of finished goods or other goods involving no or little value addition c. cost-price method; • Considers direct and indirect costs of production incurred by an enterprise in respect of property transferred or services provided and an appropriate mark-up. • Used mainly in respect of provision of services, joint facility arrangements, transfer of semi finished goods, long-term buying and selling arrangements d. profit-split method; • Considers combined net profit of the AEs arising from the international transaction and its split amongst them. • Used mainly in report of transactions involving integrated services provided by more than one enterprise, transfer of unique intangibles, multiple inter-related transactions, which cannot be separately evaluated e. transactional net margin method. • Considers net profit margin realised by the enterprise from an international transaction entered into with an AE. • Used in respect of transactions for provision of services, distribution of finished products where resale price method cannot be adequately applied, transfer of semi-finished goods f. Any other method as prescribed by the CBDT. The CBDT has not yet prescribed any other method. The most appropriate method from the above method shall be applied for determination of the arm’s length price in the manner laid down in Rule 10C.
7. The term "enterprise" is defined in section 92F(iii) to mean a "person" including a "permanent establishment" of a person who is, or has been or is proposed to be "engaged in" certain specified activities. These activities are in relation to : • production storage, supply, distribution, acquisition or control of: • articles or goods; or • know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature; or • any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process: • of which the other enterprise is the owner; or • in respect of which the other enterprise has exclusive rights; OR • provision of services of any kind; OR • carrying out any work in pursuance of a contract; OR • investment OR • providing loan OR • business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate. Such activity or business may be carried on directly or through one or more of the units or divisions or subsidiaries, which may be located at the same place where the enterprise is located or at a different place(s). 8. The term "Permanent Establishment" is defined to include a fixed place of business through which the business of the enterprise is wholly or partly carried on. 9. An "enterprise" is an AE:- • Which participates directly or indirectly in the management or control or capital of the other enterprise.
04 June 2009
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