B Inc. London has 37% equity in RTP Ltd. an Indian Company. The company RTP Ltd is engaged in development of software and maintenance of customers across the globe, which includes B Inc. During the financial year 2023-24

CS Professional · Advanced Tax Laws · PYQS · June 2024
B Inc. London has 37% equity in RTP Ltd. an Indian Company. The company RTP Ltd is engaged in development of software and maintenance of customers across the globe, which includes B Inc. During the financial year 2023-24, RTP Ltd. spent 1500 man hours for developing and maintaining a software for B Inc. and billed at ₹ 900 per hour. The cost incurred for executing maintenance work to B Inc. for RTP Ltd. amount to ₹ 14,00,000. Similar such work was done for unrelated party Fry Ltd. in which the profit was at 50%. B Inc. gives technical support to RTP Ltd. which can be valued at 12% of gross profit. There is no such functional relationship with Fry Ltd. RTP Ltd. gives credit period of 60 days the cost of which is 4% of the normal billing rate which is not given to other parties. Compute Arm's Length Price (ALP) under cost plus method in the hands of RTP Ltd. and the impact of the same on the total income under Income Tax Act, 1961.

Answer & Explanation:

Computation of Arm's Length Gross Profit Mark-up Particulars % Normal Gross Profit Mark up (from Fry Ltd.) 50 Less: Adjustment for differences Technical support from B Inc [12% of Normal GP = 12% of 50%] (6) 44 Add: Cost of Credit to B Inc 4% of Normal Bill [4% * GP 50%] 2 Arm's Length Gross Profit mark-up (%) 46 (B) Computation of Increase in Total Income of B Inc. Particulars Amount in ₹ Cost of services 14,00,000 Arm's length Billed Value [Cost / [(100 - Arm's Length markup)] [₹ 14,00,000 / (100% - 46%)] 25,92,593 Less: Billed amount [1500 man hours x ₹ 900 per hour] 13,50,000 Therefore, Increase in Total Income 12,42,593

Topics: Income Tax Act

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