ABC Ltd. is a foreign subsidiary company of XYZ Ltd. XYZ Ltd. sells refrigerators to ABC Ltd. at a price of ₹ 10,000 each for sale to its dealers in Singapore. In other States, XYZ Ltd. is directly selling to their deale

CS Professional · Advanced Tax Laws · PYQS · December 2019
ABC Ltd. is a foreign subsidiary company of XYZ Ltd. XYZ Ltd. sells refrigerators to ABC Ltd. at a price of ₹ 10,000 each for sale to its dealers in Singapore. In other States, XYZ Ltd. is directly selling to their dealers at ₹ 12,000 with a warranty of one year (₹ 500 for each fridge). ABC Ltd. does not offer such warranty. Quantity sold to ABC Ltd. is 8000 units and to dealers of XYZ Ltd. is 3000 units. Discuss the method to be applied to arrive at the arm's length price and compute the ALP. How is the assessment of XYZ Ltd. going to be affected?

Answer & Explanation:

ABC Ltd. and XYZ Ltd. are associated enterprise as ABC Ltd is subsidiary of XYZ Ltd. Comparable product (fridge) is sold to dealers (Uncontrolled transactions). Hence in given circumstances Comparable Uncontrolled Price (CUP) Method for determining arm's length price can be applied. Particulars Amount Sale price charged to Dealers of XYZ Ltd. 12,000 Less cost of warranty included in price (500) Arm length price 11,500 Actual price paid by ABC Ltd. to XYZ Ltd. 10,000 Difference per unit 1,500 Addition required to be made in the computations of the total Income of XYZ Ltd. (1500 x 8000 units) 1,20,00,000 No deduction under chapter VI-A would be available in respect of the enhanced Income.

Topics: International Taxation

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