Intercompany dealings between an Indian subsidiary and its foreign parent are tested twice: under the Companies Act and under the transfer pricing rules. The two regimes ask different questions, and a transaction can pass one and fail the other.
The Companies Act test
Section 188 requires board approval, and shareholder approval above prescribed limits, for specified related party transactions, unless they are in the ordinary course of business and at arm's length. Related parties must also be disclosed in the financial statements and in the board's report. A private company has fewer approval limits than a listed one, but the record-keeping duty remains. Check the current thresholds and exemptions.
The transfer pricing test
The Income-tax Act requires an arm's length price for international transactions with associated enterprises and, in some cases, specified domestic transactions. The company files an accountant's report and keeps documentation.
Where the two differ
- The Companies Act exemption for arm's length dealing relies on a board view. The tax test relies on benchmarking and economic analysis.
- A parent may be a related party under one law and not an associated enterprise under the other, because the definitions differ.
- The Companies Act asks for approval before the transaction. The tax law looks at the price after the year ends, which can lead to adjustments that need their own accounting treatment.
A workable approach
- Maintain one master list of related parties and update it each quarter.
- Take board approval for the intercompany agreement at the start, with the pricing basis recorded.
- Use the transfer pricing study to support the arm's length statement for the Companies Act.
- Review year-end true-up entries for approval and disclosure.
One policy, one list and one set of minutes can serve both regimes.
The author is a M.Com., FCS, LL.B., Partner, A2 Consultants, Hyderabad. The views are personal and for general information only.
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