Related Party Transaction
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
26 February 2011
Company X is a foreign company having CONTROL over Company Y and Company Z. Company Y and Company Z are Indian companies. So whether any transaction between company Y and Company Z is to be treated as related party transaction u/s 40A(2)(b)? Should this be reported in Form 3CD?
Please let me know with this and if possible with a proper proof (Urgent)
Please let me know with this and if possible with a proper proof (Urgent)
Ashok Asthana
(Expert)
26 February 2011
I think Yes,because Company X, Y, Z are directly related as Company X has control over Company Y & Z
Querist : Anonymous
Querist :
Anonymous
(Querist)
26 February 2011
Even I think the same, by the way don't you think this is covered in section 40A(2)(b)(v) which says
"a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member"
"a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member"
21 July 2025
Let's clarify the issue regarding related party transactions between Company Y and Company Z, both Indian companies controlled by foreign Company X, in the context of Section 40A(2)(b) and Form 3CD reporting.
1. Are transactions between Company Y and Company Z related party transactions under Section 40A(2)(b)?
Yes.
Since Company X (foreign company) has control over both Company Y and Company Z, the two Indian companies are related parties to each other.
Section 40A(2)(b) specifically deals with transactions with related parties where payment made is considered unreasonable and disallowed.
The term "related party" includes companies under common control.
The fact that both companies are controlled by the same foreign parent company means transactions between Y and Z come under the related party category.
2. Should such transactions be reported in Form 3CD?
Yes.
As per Clause 40A(2)(b)(v) of Income Tax Act and the tax audit reporting requirements (Form 3CD), any transactions with related parties must be disclosed.
Specifically, Form 3CD requires disclosure of related party transactions along with details such as nature, amount, terms, etc.
3. Legal / Section Reference:
Section 40A(2)(b)(v) states that any payment made to a related party as defined (including companies where a director or partner has substantial interest) may be disallowed if not reasonable.
Related parties include companies with common control — here, Company X controls both Y and Z.
Clause 44 of the Accounting Standard (AS) 18 on Related Party Disclosures also recognizes such transactions.
1. Are transactions between Company Y and Company Z related party transactions under Section 40A(2)(b)?
Yes.
Since Company X (foreign company) has control over both Company Y and Company Z, the two Indian companies are related parties to each other.
Section 40A(2)(b) specifically deals with transactions with related parties where payment made is considered unreasonable and disallowed.
The term "related party" includes companies under common control.
The fact that both companies are controlled by the same foreign parent company means transactions between Y and Z come under the related party category.
2. Should such transactions be reported in Form 3CD?
Yes.
As per Clause 40A(2)(b)(v) of Income Tax Act and the tax audit reporting requirements (Form 3CD), any transactions with related parties must be disclosed.
Specifically, Form 3CD requires disclosure of related party transactions along with details such as nature, amount, terms, etc.
3. Legal / Section Reference:
Section 40A(2)(b)(v) states that any payment made to a related party as defined (including companies where a director or partner has substantial interest) may be disallowed if not reasonable.
Related parties include companies with common control — here, Company X controls both Y and Z.
Clause 44 of the Accounting Standard (AS) 18 on Related Party Disclosures also recognizes such transactions.
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