Whether two Enterprise are Associated Enterprise – Transfer Pricing – Case Study
(a) Based on the following data, you are required to ascertain whether Chappel Inc., and Hetal India Private Limited, are Associated Enterprises, in respect of each of these criterion (assume each one of them on a standalone basis): –
(b) Which transaction will be covered under the Transfer Pricing provisions, if Chapell Inc. held 30% of the equity share capital of Hetal India?
| Nature of Instrument | Hetal India | Held by Chappel Inc | Chappel Inc | Held by Hetal India |
| Equity Shares | 10,000 | 2,400 | 20,000 | 4,600 |
| Book Value of Assets (Rs. In crores) | Rs. 500 crores | Rs. 5000 crores | ||
| Loan taken | Rs. 340 crores | Rs. 200 crores | ||
| Guarantee given in respect of Borrowings for | Rs. 30 crores | |||
| Total Directors | 8 | 3 | 10 | 4 |
| Total revenue from Sale | Rs. 500 crores | |||
| % of raw material as a cost of Sales | 80% | |||
| Inter party purchase of raw material | Rs. 356 crores |
Whether two Enterprise are Associated Enterprise – Transfer Pricing Case Study – Solution:-
(a)The various criterion, and whether Hetal India or Chappel Inc, would be considered as AE’s are discussed as under: –
-Since Hetal India or Chappel Inc, does not have more than 26% equity share capital of Chappel Inc. (24%) or vice versa (23%), the two parties would not be considered as AE’s;
-Since, Chappel Inc has advanced loan of 40% (200/500*100) % = 40%) of book value of total assets to Hetal India, the two parties would not be considered as AE’s ;
-Since, Chappel Inc. has guaranteed less than 10% of the total borrowings (i.e. 30/ 500 = 6%) of Hetal India, the two parties would not be considered as AE’s ;
-Hetal India or Chappel Inc would not be treated as AE, as 90% or more of raw materials and consumables, required for the manufacture by ICO, are not supplied by Chappel Inc (Rs. 320/Rs. 400*100) = 80%. The total cost of raw material of Hetal India is 80% of Rs. 500 crores = Rs. 400 crores
-Since, Hetal India has made appointment of less than 50% of Board of Directors of Chappel Inc (4/10 = 40%) , the two enterprise would not be considered as Associated enterprise. Similarly, since, Chappel Inc has made appointment of less than 50% of Board of Directors of Hetal India (3/8 = 37.5 %) , the two enterprise would not be considered as Associated enterprise.
(a)If Chappel Inc,, has more than 26% equity share capital of Hetal India the two parties would be considered as AE’s , and all the transaction between them would be covered under the Transfer pricing provisions.
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