Skip to content

CS Professional · Advanced Direct Tax Laws and Practice · Transfer Pricing and General Anti Avoidance Rules (GAAR)

Mehta Auto Ltd, an Indian company, sells components to Kiran Traders, an unrelated Indian firm, under a prior agreement between Kiran Traders and Mehta Auto's associated enterprise in Germany. The agreement fixes the price of the components. Under section 163(2) of the Income-tax Act, 2025, how is the sale to Kiran Traders treated?

The sale is deemed an international transaction. Section 163(2) covers a transaction with an unrelated person where a prior agreement with the associated enterprise exists, and either enterprise is non-resident. The other person's residence is irrelevant, as is any loss.

  1. ANot an international transaction, because Kiran Traders is not an associated enterprise
  2. BDeemed an international transaction with an associated enterprise, since a prior agreement exists with the non-resident associated enterpriseCorrect
  3. CAn international transaction only if Kiran Traders is also a non-resident
  4. DAn international transaction only if the price results in a loss

Explanation

Section 163(2) deems a transaction with a non-associated person to be an international transaction if there is a prior agreement between that person and the associated enterprise, or the terms are determined in substance between them, and the enterprise or its associated enterprise is a non-resident. Here the German associated enterprise is non-resident. The residence of the other person is irrelevant, so the third option is wrong.

Did you get it right without looking?

One question tells you little. A timed set on Transfer Pricing and General Anti Avoidance Rules (GAAR) shows your real accuracy, how long you take and where you lose marks.

Practise Transfer Pricing and General Anti Avoidance Rules (GAAR)Free diagnostic mock

More Transfer Pricing and General Anti Avoidance Rules (GAAR) questions