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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Direct Tax Laws & International Taxation

Case: Lakshmi Exports Ltd (India) sold goods worth Rs 50,00,000 to its associated enterprise in Dubai. Lakshmi's cost is Rs 40,00,000. A comparable uncontrolled transaction shows an arm's length price of Rs 56,00,000 for the same goods. Under the Transfer Pricing provisions, what adjustment is made to Lakshmi's income, ignoring the tolerance range?

Income must be increased by Rs 6,00,000, being the difference between the arm's length price of Rs 56,00,000 and the actual price of Rs 50,00,000. Transfer pricing compares the price charged with the arm's length price, not with cost, so the existence of profit does not matter.

  1. ARs 6,00,000 increaseCorrect
  2. BRs 16,00,000 increase
  3. CRs 6,00,000 decrease
  4. DNo adjustment, since a profit is already earned

Explanation

Transfer price actually charged is Rs 50,00,000 while the arm's length price is Rs 56,00,000. Income is understated by Rs 6,00,000, so it is increased by that amount. Rs 16,00,000 wrongly compares ALP with cost. A profit existing does not remove the need for adjustment.

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