20 February 2021
B Ltd holding 40% stake in A Ltd. (B Ltd is foreign Company while A Ltd is Domestic Company). A Ltd pays sitting fees to the directors of B Ltd. In such situation, whether A Ltd has to comply the provision of International Transfer Pricing provisions i.e. Directors of B Ltd are 'Associated Enterprises' . Accordingly please advise us.
If A Ltd already made the provision in the books of account for F Y 2017-18 in Mar, 18 for sitting fees payable. Whether disclosure of sitting fees in transfer pricing report in form 3CEB is based on accrual basis or on actual payment basis.
11 July 2024
In the scenario described, where A Ltd (a domestic company) pays sitting fees to directors of B Ltd (a foreign company), and B Ltd holds a 40% stake in A Ltd, the situation triggers considerations under international transfer pricing provisions, particularly with respect to determining whether B Ltd and A Ltd are considered 'Associated Enterprises'.
### Associated Enterprises:
Under Indian transfer pricing regulations (Section 92A of the Income Tax Act), two enterprises are considered associated enterprises if there exists direct or indirect control, participation, or management between them. Given that B Ltd holds a significant stake (40%) in A Ltd, they are likely to be considered associated enterprises.
### Transfer Pricing Implications:
1. **Arm's Length Principle**: Transactions between associated enterprises must be conducted on an arm's length basis, meaning the terms and conditions of such transactions (including payment of sitting fees) should be comparable to what would be agreed upon between unrelated parties under similar circumstances.
2. **Transfer Pricing Documentation (Form 3CEB)**: - A Ltd is required to maintain transfer pricing documentation to substantiate that the sitting fees paid to directors of B Ltd are at arm's length. - Form 3CEB is the report filed by the taxpayer's accountant providing details of international transactions and transfer pricing compliance. It includes disclosure of related party transactions and the methodology used to determine arm's length pricing.
3. **Accrual Basis vs. Actual Payment**: - For the purposes of transfer pricing reporting (Form 3CEB), transactions are typically reported on an accrual basis. This means that sitting fees provisioned in the books of accounts for FY 2017-18 (even if not yet paid) should be disclosed in the transfer pricing report. - The disclosure in Form 3CEB should reflect the provision made by A Ltd for sitting fees payable to directors of B Ltd during the relevant financial year.
### Compliance Advice:
- **Review of Terms**: Ensure that the terms and conditions of the sitting fees paid by A Ltd to directors of B Ltd are documented and can be justified as per the arm's length principle.
- **Documentation**: Maintain comprehensive transfer pricing documentation to support the arm's length nature of the sitting fees paid. This should include benchmarking studies or other methods used to determine the appropriate amount of sitting fees.
- **Form 3CEB Filing**: Disclose the provision for sitting fees payable in Form 3CEB based on accrual basis, providing details of the transaction, the associated enterprise (B Ltd), and the method used to determine the arm's length pricing.
Given the complexities involved in transfer pricing and international transactions, it is advisable to engage a qualified transfer pricing consultant or tax advisor who can provide specific guidance tailored to your company's circumstances and ensure compliance with Indian transfer pricing regulations. They can also assist in preparing the necessary documentation and filing requirements accurately.
CAclubindia
