A Ltd., a US company has a subsidiary B Ltd. in India. A Ltd. sells Laptops to B Ltd. for resale in India. A Ltd. also sells laptops to C Ltd., another reseller. It sells 40,000 Laptops to B Ltd. at ₹10,000 per unit. The

CS Professional · Advanced Tax Laws and Practice · PYQS · December 2018
A Ltd., a US company has a subsidiary B Ltd. in India. A Ltd. sells Laptops to B Ltd. for resale in India. A Ltd. also sells laptops to C Ltd., another reseller. It sells 40,000 Laptops to B Ltd. at ₹10,000 per unit. The price fixed for C Ltd. is ₹9,000 per unit. The warranty in case of sale of laptops by B Ltd. is provided by B Ltd. However, for laptops sold by C Ltd., A Ltd. is responsible for providing service warranty for 3 months. Both A Ltd. and B Ltd. offer extended warranty at a standard rate of ₹1,000 per annum. On the basis of these facts explain the method which can be applicable for determination of arm's length price. Also determine the effect on the net profit/income of B Ltd. (Assuming that C Ltd. has not entered into an advance pricing agreement) in the scenario discussed above. Determine the arm's length price also.

Answer & Explanation:

A Ltd., the foreign company, and B Ltd., the Indian company, are associated enterprises since A Ltd. is the holding company of B Ltd. A Ltd. sells laptops to B Ltd. for resale in India. A Ltd. also sells identical laptops to C Ltd. which is not an associated enterprise. The price charged by A Ltd. for a similar product transferred in comparable uncontrolled transaction is available. Therefore, Comparable Uncontrolled Price 'CUP' method for determining arm's length price can be applied. For sale of laptops by C Ltd. A Ltd. is responsible for warranty of 3 months. The price charged by A Ltd. to C Ltd. includes the charge for warranty for 3 months. Hence arm's length price for laptops being sold by A Ltd. to B Ltd. would be: Particulars Amount (₹) Sale Price per laptops charged by A Ltd. from C Ltd. 9,000 Less: Cost of warranty included in the price charged to C Ltd. (₹1000*3/12) (250) Arm's Length Price 8,750 Actual Price paid by B Ltd. to A Ltd. 10,000 Difference per unit 1,250 No. of units supplied by A Ltd. to B Ltd. = 40,000 Addition of Income required to be made in the computation of total income of B Ltd. = ₹1,250 * 40,000 = ₹5,00,00,000 Note: No deduction under chapter VI-A would be allowable in respect of the enhanced income of ₹5 crores.

Topics: Income Tax Act, 1961

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