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Whether two Enterprise are Associated Enterprise

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May 5, 2021

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5 mins read

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:-

International Taxation Services

(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.

For any queries, please write them in the Comment Section or Talk to our tax expert

Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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