Section 92C of ITA, 1961 : Section 92C: Computation Of Arms Length Price

Explanation using Example

Imagine a company in India, TechSolutions Pvt Ltd, which has a subsidiary in Singapore, TechSolutions SG. They engage in an international transaction where TechSolutions SG provides specialized software services to TechSolutions Pvt Ltd for $100,000. The Indian tax authorities suspect that this price is not reflective of the market rate and may have been set to shift profits to the Singapore subsidiary, where tax rates are lower.

The Income Tax Officer (ITO) decides to apply Section 92C of the Income-tax Act, 1961 to determine the arm's length price of the transaction. The ITO considers various methods such as the Comparable Uncontrolled Price (CUP) method, Resale Price Method (RPM), and others to find the most appropriate method for this transaction. After analysis, the ITO selects the CUP method, comparing the transaction to similar services sold between independent companies.

Upon comparison, the ITO finds that the average market price for similar services is $150,000. According to the second proviso of Section 92C, if the difference between the arm's length price ($150,000) and the transaction price ($100,000) does not exceed a certain percentage (let's say 3% for this example), the actual transaction price can be accepted as the arm's length price. However, in this case, the difference is 50%, which is significantly higher than 3%.

Therefore, the ITO determines the arm's length price to be $150,000 and adjusts TechSolutions Pvt Ltd's taxable income accordingly. TechSolutions Pvt Ltd is then notified and given the opportunity to present their case as to why the adjustment should not be made, as per the procedural fairness requirement in Section 92C.

This example illustrates how Section 92C is used to ensure that international transactions between associated enterprises are conducted at market value, preventing profit shifting and ensuring a fair tax base for the country.