Section 92F of ITA, 1961 : Section 92F: Definitions Of Certain Terms Relevant To Computation Of Arm'S Length Price, Etc

Explanation using Example

Let's say Company A in India purchases raw materials from its subsidiary, Company B in Singapore. The management of Company A is concerned about complying with the Indian Income-tax Act, particularly with transfer pricing regulations. They want to ensure that the price paid for the raw materials is consistent with the market rate that would be charged between independent companies under similar circumstances, known as the "arm's length price."

To determine this, Company A hires an accountant to prepare a transfer pricing study. The accountant analyzes transactions between similar entities in uncontrolled conditions and advises Company A on an appropriate arm's length price for the transaction. By doing so, Company A aims to avoid any adjustments by the tax authorities and potential penalties for not adhering to these regulations.

Company A and B, being related parties, are considered "associated enterprises." The transaction of buying raw materials is scrutinized under the Income-tax Act to ensure that the price is not influenced by their relationship. If it was found that the price was not at arm's length, Company A might face additional tax liabilities in India.