(B) Matters referred by ABC Professional Services: The partner of the firm have sought opinion in respect of the matters of their clients for filing reply with the tax authorities relating to the show cause notices issue

PQR Ltd, an Indian Company, and Joly Inc a US based company are deemed to be Associated Enterprises (AE) as per section 92A(2)(a) of the Income tax Act, 1961. Since Joly Inc holds shares carrying not less than 26% of the voting power in PQR Ltd of India by holding and having 32% of the shares and voting power in the company which is more than 26% to invoke the provisions of section 92A (2)(a) for being an associated enterprises (AE). As per explanation attached to section 92B of the Income tax Act, 1961, the transactions entered into between these two companies for sale of product, lending or guaranteeing the lender and provision of services relating to customers and market research (as being entered into between the two companies) are included within the meaning of "international transaction". Accordingly, transfer pricing provisions would be attracted and the income arising from such international transactions have to be computed having regard to the arm's length price (ALP). In this case, from the information given, the arm's length price (ALP) has to be determined and computed by taking the comparable uncontrolled price (CUP) method which is the most appropriate method since details of transactions entered into with the unrelated party are available. Amount by which the total income of PQR Ltd is to be enhanced on account of adjustments to be made under CUP method in the value of International Transactions between the Company and Joly Inc shall be: S. No Particulars ₹ in lacs a) Difference in the price of the T-shirts being @ $1 each for 1,50,000 pieces sold to Joly Inc. ($1 x 1,50,000 x ₹75) 1,12,50,000 b) Difference for excess payment of guarantee fee paid to Joly Inc for loan borrowed from foreign lender being difference between the amounts paid compared with payment made by unrelated party. ($20000 - $15000) = $5000 x 75 3,75,000 c) Difference for excess payment for services to Joly Inc relating to customers details for market improvement compared with payment made by unrelated party being ($20000 - $15000) = $5000 x 75 3,75,000 Total Income to be enhanced 1,20,00,000 PQR Ltd cannot claim deduction under section 10AA of the Income tax Act, 1961 in respect of ₹120 lakh being the amount of income by which the total income is to be enhanced by virtue of the first proviso to section 92C(4) of the Act.