Arm s Length Pricing Requirements

Transcription

1 Arm s Length Pricing Requirements

2 Existing Provisions on RPT (Section 297 of the Companies Act, 1956) Transaction with Related party? Specified transactions? action action Underwriting the subscription of any shares or debentures of company Sale, purchase or supply of any goods, material or services Company with PSC >= INR 1 crore? 1. CG approval 2. Board Consent Only Board Consent Specific exemptions? (te 1) action Company with PSC >= INR 1 crore? tes: 1) Specific cases where no approval is required: a) purchase/ sale for cash at prevailing market prices; or 1. CG approval 2. Board Consent Only Board Consent b) regular trade/ business between the company and specified related parties, not exceeding Rs.5,000/- p.a. for the contract period; or c) any transaction in the ordinary course of business (exemption only for banking/ insurance companies). 2) Board consent should be obtained either before the contract date or within three months (in urgent cases) 3) Contract voidable at the option of the Board, if consent is not obtained Page 2

3 Proposed Provisions on RPT (Clause 188 of the Companies Act) Transaction with Related party? Specified transactions? action Transactions in ordinary course of business? ALP? action Director s Report to disclose each RPT (irrespective of its arm s length nature) alongwith justification for entering into same prior approval Transactions > specified* amount OR PSC> specified*amount 1. Approval of shareholders by special resolution AND 2. Board Consent Only Board Consent 1) Shareholders who are related parties are restricted from voting on special resolution 2) Board consent/ shareholder approval (whichever applicable) should be obtained either before the contract date or within three months (in urgent cases) 3) Any transaction entered into without prior permission is voidable at the option of the Board, if not ratified by it or by shareholders within three months * t yet specified Page 3

4 Leveraging Transfer pricing provisions under Incometax Act Concept of prevailing market price under existing Companies Act vis-à-vis ALP under Companies Act Same arms length methodology to be of use for testing the arm s length nature of RPT under Companies Act Definition and scope of covered transaction and related party under the Companies Act different from that of international transactions / specified domestic transaction and related party under the Income-tax Act Page 4

5 Related Party Transactions covered Existing Companies Act vs proposed Companies Act Companies Act Sale, purchase or supply of any goods, material or services Underwriting the subscription of any shares in, or debentures of, the company Companies Act Sale, purchase or supply of any goods or materials Selling or otherwise disposing of, or buying, property of any kind Leasing of property of any kind Availing or rendering of any services Appointment of any agent for the purchase or sale of goods, materials, services or property Appointment of any related party to any office or place of profit in the company, its subsidiary company or associate company Underwriting the subscription of any securities or derivatives thereof, of the company Page 5

6 Companies Act Related Person Any person, on whose advice, etc Director/ Manager to act * KMP or relative** Holding Co/ Subsidiary Co/ Associate Co/ Sister concern Company Body corporate whose Board/ MD/ Manager accustomed to act on advise, etc of Director/ Manager* Any other prescribed person Public Co. Member/ Director Relative** of Director/ Manager Private. Co Member/ Director Director Partner Partner Manager Partner Firm Firm * Except if advice given in professional capacity ** The term relative is not fully defined yet # Director/ Holds more than 2% of PSC along with relatives Page 6

7 Penal consequences for non-compliance Directors liability to indemnify a company against loss arising, if any, in case of such contract/ arrangement with a related party to any Director or is authorized by any other Director Right conferred upon the company to take legal measures for recovery of loss against any Director or employee involved in contravention For any Director or employee involved in contravention, penalty would be For Listed Company: Imprisonment, which may extend up to one year, OR Fine, ranging between INR 25,000 and INR 500,000, OR Both For others: Fine ranging between INR 25,000 and INR 500,000 Disqualification of directors Apart from the mentioned penal consequences, a contract with a related party can be rendered voidable at the option of Board Page 7

8 Possible issues The term Relative is not clearly defined under Companies Act Acceptability of methods prescribed under Income-tax Act under Companies Act? Will the Transactional Net Margin Method be accepted? Will median/ inter-quartile range be more appropriate than mean? Impact of disconnect between ALP determined under Companies Act and ALP under Income-tax Act ALP determined under Companies Act and any ALP as per orders by Incometax/ Appellate authorities Page 8

9 What companies need to do Analyze Company Act provisions with respect to RPT and applicability thereof well in advance Determine the related parties involved in each transaction Evaluate transactions with such related parties Determine ALP for the specified transactions Examine approval requirement and disclosure requirement in Directors report under Company Act provisions Take corrective action as may be necessary Examine and document RPT pricing policies and ALP justification prior to entering transactions Alignment of ALP with TP of international/ domestic transactions Cost audit rules Page 9