Income to be computed at arm’s length price [Section 92(1)]
Any income arising from an international transaction shall be computed having regard to the arm’s length price.
Although the term ‘income’ used above has not been elaborated in section 92, but it can only mean gross income/gross receipts or gross revenues. However, any adjustment to such gross revenue on the basis of arm’s length price would definitely have impact on the determination of total income.
International transaction means a transaction between two or more associated enterprises, either or both of whom are non-resident and such transaction is in the nature of purchase/sale of property or provision of service or lending and borrowing money, etc. (For detailed meaning see section 92B, para 3.4).
Further, the use of term ‘an’ international transaction indicates that the adjustments are to be made in the income vis-a-vis individual transaction. However, as per rule 10A(d) “transaction” includes a number of closely liked transactions. Thus, in this case, the adjustment may be done for the aggregate of closely liked transaction if the circumstances so permit.
Explanation to Section 92(1)
From the above, it is clear that the provisions of arm’s length price shall apply not only to income generating transactions (e.g. sale of goods, royalty, fee for technical services, know-how, etc.) but also to transactions resulting into expenditure (purchases, interest on loan, etc.)
Example Computation of Arm’s Length Price
Thus, if an enterprise in India sells goods or provides services to an associated enterprise in Germany for ₹30,00,000, whereas the arm’s length price is ₹50,00,000, then the income of the Indian enterprise shall be determined with reference to the arm’s length price of the sale of such goods/provision of such services, i.e., it shall be ₹50,00,000.
Similarly, if an Indian enterprise in India purchases goods from an associated enterprise in US for ₹80,00,000 whereas the arm’s length price is ₹60,00,000. The income of Indian enterprise shall be determined by allowing the expenses of purchase as ₹60,00,000 (i.e., the arm’s length price) instead of ₹80,00,000.
Alternatively, if an enterprise in India takes a loan from an associated enterprise in Germany @ 12% p.a. whereas the market rate of interest is 8% p.a., the Indian enterprise in this case shall be allowed a deduction on account of interest @ 8% p.a. instead of 12% p.a.