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

Sharma Pharma Ltd (India) and its Singapore associate agree to share the cost of a global research centre, each contributing in proportion to expected benefit. No profit is affected in the current year. Also, Sharma Pharma later transfers a business division to the Singapore associate in a restructuring that changes no profit or asset figures at that time. Which statement is correct under section 163(1)?

Both are international transactions. Business restructuring is covered irrespective of any bearing on profit, income, losses or assets, and cost allocation or contribution arrangements between associated enterprises are separately covered. The absence of a current-year profit effect does not take either outside section 163(1).

  1. ANeither is an international transaction because no profit is affected
  2. BOnly the cost-sharing arrangement is covered; restructuring is covered only if profits change
  3. CBoth are covered, since cost contribution arrangements fall under clause (f) and restructuring is covered under clause (e) irrespective of any bearing on profit, income, losses or assetsCorrect
  4. DOnly the restructuring is covered; cost-sharing is a domestic matter

Explanation

Clause (e) covers business restructuring or reorganisation irrespective of any bearing on profit, income, losses or assets at the time or later. Clause (f) covers mutual agreements for allocating or contributing to costs or expenses for benefits, services or facilities. Both involve a non-resident associate, so both qualify.

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