Reverse Factoring
This query is : Resolved
Quick Summary
02 December 2025
Hi, Let's say there is intercompany A which sells raw material to company B.Company B make payment to A on receipt of Invoice. Can company B bring company A under the reverse factoring program wherein bank will fund the invoice at certain interest cost and on due date company B makes payment to bank. it's standard practice for regular vendor but want to understand the possibility or regulation around this for Intercompany.
03 December 2025
Yes, in principle an intercompany supplier (Company A) can be brought under a reverse factoring program with Company B, but regulatory and accounting treatment is more complex. RBI guidelines require reverse factoring to be routed through registered TReDS platforms, and intercompany arrangements raise questions of related-party transactions, transfer pricing, and disclosure. It is possible, but it must be structured carefully to comply with factoring regulations, RBI oversight, and accounting standards.
03 December 2025
Intercompany Specific Considerations
- Related Party Transactions:
- Intercompany dealings fall under related-party transaction rules.
- Reverse factoring here is not a typical vendor arrangement; regulators may scrutinize whether it is being used to shift liquidity or costs artificially.
- Transfer Pricing & Tax:
- Interest cost borne by Company A (supplier) or Company B (buyer) must be aligned with arm’s length principles.
- Any benefit from early payment financing must be documented to avoid tax disputes.
- Accounting Treatment:
- Under IND AS/IFRS, reverse factoring changes the classification of liabilities.
- Instead of “trade payables,” Company B may need to show “borrowings” if the arrangement resembles financing rather than trade credit.
- Disclosure in notes to accounts is required.
- Regulatory Compliance:
- RBI permits factoring for any company receivables, but intercompany transactions may raise substance-over-form concerns.
- The bank must ensure the transaction is genuine and not a disguised intra-group loan.
- Related Party Transactions:
- Intercompany dealings fall under related-party transaction rules.
- Reverse factoring here is not a typical vendor arrangement; regulators may scrutinize whether it is being used to shift liquidity or costs artificially.
- Transfer Pricing & Tax:
- Interest cost borne by Company A (supplier) or Company B (buyer) must be aligned with arm’s length principles.
- Any benefit from early payment financing must be documented to avoid tax disputes.
- Accounting Treatment:
- Under IND AS/IFRS, reverse factoring changes the classification of liabilities.
- Instead of “trade payables,” Company B may need to show “borrowings” if the arrangement resembles financing rather than trade credit.
- Disclosure in notes to accounts is required.
- Regulatory Compliance:
- RBI permits factoring for any company receivables, but intercompany transactions may raise substance-over-form concerns.
- The bank must ensure the transaction is genuine and not a disguised intra-group loan.
03 December 2025
If Company B wants to include Company A in reverse factoring:
- Route through TReDS for compliance.
- Prepare audit-defensible documentation (arm’s length pricing, related-party disclosures).
- Classify correctly in financial statements (likely borrowings).
- Seek advance clarity from tax advisors to avoid transfer pricing disputes.
- Route through TReDS for compliance.
- Prepare audit-defensible documentation (arm’s length pricing, related-party disclosures).
- Classify correctly in financial statements (likely borrowings).
- Seek advance clarity from tax advisors to avoid transfer pricing disputes.
You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now
Click here to login now
Similar Resolved Queries
Unanswered Queries
- CG Tax On residential property
- Post Office RD Interest
- Applicable TDS for Purchase of Flat from NRI
- Eway bill for machinery reparing
- Claiming exemption of perquisite for employee-owned car under New Tax Regime in ITR-2
- Gift of mutual fund units to daughter
- Building tax payment deduction in rental Income
- NRI ITR2 account in 2025-26 ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,.
- Reporting of STCG on Property in ITR
- Not able to file ITR
- Presumptive income under 2025 ACT
- Upload Level ValidationITR3Category of Defect B/D
- Presumptive income under Income tax act 2025
- Clarification Required on Business Code for 44ADA
- Under construction property in ITR
- PF Taxable Income
- Clarification on Tax Audit Applicability and Reporting of F&O Transactions in ITR-3
- Interest credited in FY2025-2026 & TDS therein by EPFO does not reflect in AIS or Form 26AS
- 44ad eligble money lending interest
- Delisted shares sold in off market/ Rebate u/s87A
Trending Online Classes
-
DT & Audit (Exam Oriented Fastrack Batch) - For May 26 Exams and onwards Full English
CA Bhanwar Borana & CA Shubham Keswani
Subscribe to Pro
Join an elite circle of professionals
CAclubindia
