Zonik Inc of Canada holds 35% shares of Gama India Ltd. Gama India Ltd. imports 2000 unit of product X from Zonik Inc Canada at a price of ₹1,500 per unit and these are sold to Sunil Regency Ltd. at a price of ₹1,700 per

CS Professional · Advanced Tax Laws · PYQS · June 2019
Zonik Inc of Canada holds 35% shares of Gama India Ltd. Gama India Ltd. imports 2000 unit of product X from Zonik Inc Canada at a price of ₹1,500 per unit and these are sold to Sunil Regency Ltd. at a price of ₹1,700 per unit. Gama India Ltd. has bought similar products from Ronak India Ltd. and sold to Vijay Ltd. at a gross profit of 14% on sales. Zonik Inc Canada offers a quantity discount of ₹15 per unit whereas Ronak India Ltd. does not offer such quantity discount. Gama India Ltd. incurred freight of ₹10 per unit and customs duty of ₹30 per unit in case of purchases made from Zonik Inc Canada. On the basis of these facts explain the method which would be applicable for determination of Arm's Length Price (ALP) under Income Tax Act, 1961. Determine the Arm's Length Price on the basis of the method as found to be applicable and also determine the effect on the net Profit/Income of Gama India Ltd. (assuming that there is no advance pricing agreement) in the scenario discussed above.

Answer & Explanation:

Arm's Length Price is determined on the basis of Resale Price Method The Resale Price Method (RPM) is applicable here as Gama India Ltd. resells the product, and there is information about the gross profit margin on similar products from an unrelated party (Ronak India Ltd. to Vijay Ltd.). Particular Amounts (₹) Resale price of goods purchased from Zonik Inc Canada (per unit) 1700 Less: Normal Gross Profit Margin @ 14% on ₹1700 (per unit) (238) Less: Expenses connected with purchases (freight and customs duty i.e. ₹10 + ₹30) (40) Less: Quantity discount allowed by Zonik Inc Canada (adjustment for comparability) (15) Arm's Length Price (per unit) 1407 Price paid to Zonik Inc Canada (per unit) 1500 Excess price paid per unit (1500 - ₹1407) 93 Increase in Income of Gama Limited (₹93 * 2000 units) 186000

Topics: Income Tax Act

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