How Related Party Transactions are regulated in India? taxmann.com 59 (Article)

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How Related Party Transactions are regulated in India? taxmann.com 59 (Article) Introduction 1. Related Party Transaction (RPT) simply means any between two parties who are joined toger through a special relationship. Some of examples are: A director or his relative; A key managerial personnel or his relative; A firm, in which a director, manager or his relative is a partner; A private company in which a director or manager is a member or director; Anybody corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with advice, directions or instructions of a director or manager; Any person on whose advice, directions or instructions a director or manager is accustomed to act: Corporates generally transact amongst group entities or related parties for operational ease. However, it can easily be misused by corporates as a tool to evade taxes. This is also evident from some of recent corporate scams. Government has been finding various means and ways to regulate se types of s. Thus, various legislations operational in India have made it mandatory to report s with concerned authority. The reporting regime prevalent in India aims to assess genuineness of by comparing it with Arm's length. 2. Two regulations which deal with RPTs in India The Income Tax Act, 1961; and The Companies Act, 2013. These have been discussed in details below:- 2.1 Income Tax Act, 1961 Type of Reporting Transactions to be reported Purpose of reporting Consequenc e Due Date Tax Audit Report Any expense (capital or revenue) in respect of which payment has been made to a person referred to as "Related Party" Auditor to certify that expense is not reasonable So much of expenses which excessive and are September 30, 2017 November 30,2017 (for corporates

and excessive. If orwise, same needs to be mentioned in a note. This helps Indian Revenue Authority in examining genuinenes s of. unreasonabl e will not be allowed as business expenditure and, hence, would be added to taxable income of taxpayer having internation al ) Form 3CEB (Du e Date- November 30) Internation al (a) between two or more associated enterprises, eir or both of whom are nonresidents. Specified Domestic (exclusive list prescribed) if aggregate value of all specified domestic s exceeds To ensure Taxable that income of transactio taxpayer n with is adjusted related if value party is at of arm's length is not at Any arm's length deviation price needs to be reported November 30,2017

threshold limit of INR 5 Crore The Companies Act, 2013 2.2 The corporates entering into specified s with related party have to seek following approvals: (1) Approval of board of directors. director who has `a specified interest` in contract or arrangement with such related party must not be present at meeting during discussions pertaining to subject matter of contract or arrangement. However, private companies are exempted from this obligation, upon disclosure of interest by directors. (2) Shareholders' approval is required in case amount of exceeds prescribed threshold limit. However, private companies are exempted from this obligation, upon disclosure of interest by directors. However, above-stated conditions shall not be applicable in case of s which a company enters, into in its ordinary course of business which are on arm`s length basis. Non-Compliance 3. In cases where a contract or an arrangement is entered into by a director or any or employee, without obtaining consent of board or approval in general meeting n in such cases, contract or arrangement shall be treated as voidable at option of board of directors. In case of listed company, such a director or employee who contravene provisions of act shall be punishable with imprisonment for a term which may extend to one year or fine of not less than twenty-five thousand rupees which may extend to five lakh rupees or both and in case of any or company, such director or employee shall be punishable with fine of not less than twenty-five thousand rupees, but which may extend to five lakhs. Disclosures 4. There is no specific reporting requirement before any authority. However, company needs to do certain disclosures as stated below:- Disclosures Type Consequence Board Meeting The agenda of board meeting in which resolution is passed must consist of following: Name and nature of relationship with related party In case of listed company, such a director or employee who contravenes provisions of Act shall be punishable with imprisonment for a term which may extend to one year or fine of not less than twenty-five

Disclosures by interested directors Shareholders' Meeting The duration of contract Material terms of contract or arrangement If any advance has been paid or received for contract or arrangement Manner of determining pricing and commercial terms Every director having any direct or indirect interest in contract or arrangement must disclose that interest and concern. Such director is also not allowed to participate in such meeting, except in case of private companies. In case, amount of exceeds limits prescribed, approval of shareholders will also be required. Explanatory Statement annexed with Notice calling for General meeting, will also include prescribed details of s proposed, such as basis of s, material terms, amount, and relationship with related party, etc. thousand rupees which may extend to five lakh rupees or both In case of any or company, such director or employee shall be punishable with fine of not less than twenty-five thousand rupees but which may extend to five lakhs. If a director contravenes this provisions such director shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be of less than fifty thousand rupees but which may extend to one lakh rupees, or with both. In case of listed company, such a director or employee who contravenes provisions of Act shall be punishable with imprisonment for a term which may extend to one year or with fine of not less than twenty-five thousand rupees which may extend to five lakh rupees or both In case of any or company, such director or employee shall be punishable with fine of not less than twenty-five thousand rupees but which may extend to five lakhs.

Director's report Register Every related party shall be disclosed in board's report along with justification of entering into such Every related party s must be disclosed in register maintained by company Punishable with a fine which shall not be of less than fifty thousand rupees but which may extend to twenty-five lakh rupees; and Every officer of company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be of less than fifty thousand rupees but which may extend to five lakh rupees, or with both. Every director who fails to comply with provisions of this section and rules made reunder shall be liable to a penalty of twenty-five thousand rupees. Annual Filing Submission of company's Annual report which includes audited financial statement and Director's report with Registrar of Companies within 30 days from date of Annual general Meeting The company shall be punishable with fine of one thousand rupees for every day during which failure continues but which shall not be more than ten lakh rupees; Following person shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be of less than one lakh rupees but which may extend to five lakh rupees, or with both: (1) Managing Director and Chief Financial Officer of company (2) In absence of above two, any or director who is charged by Board with responsibility of complying with provisions of this section, and

(3) In absence of above, all directors of company. Concluding Remarks 5. Though it is very critical to have RPT from commercial standpoint, yet it is important to have same regulated. But having said this, it cannot be denied that a related-party can play a beneficial role by saving costs and improving operating efficiency of a company. In fact, re may be several s that are unavoidable because y make commercial sense for company; if companies are prohibited from entering into such s, it might work against principle of maximising shareholders value.