Applicability of 92E and 3CEB

Tax queries 403 views 4 replies

Ritesh Khot

Director

28 Points Joined July 2016

My client is a new software company (turnover > 1 cr) in India (2 Individual shareholders) and their sole (100%) client is a US company with whom they have a cost + mark up contract for development of software. Few words in the names of the US company and Indian company are similar (first name same) but shareholding is different and no control/decision/voting powers or inter company loans exists.

Only relationship is that one of the shareholder of the US company and the Director of the Indian company are related (Indian director is brother in law of US shareholder). Would that make the US company a AE of Indian company? Would 92E and form 3CEB become applicable? Anythought or inputs would be appreciated.

Indian operations are solely run on the outsourced software development work for US company and margin earned thereof. Would 92E and form 3CEB become applicable?

Replies (4)

Dhirajlal Rambhia

SEO Sai Gr. Hosp.

208015 Points Joined July 2016

The Indian company and US company have different shareholders, and there is no direct or indirect control, voting power, inter-company loans, or board appointments based on the facts stated.
The only connection is the brother-in-law relationship between an Indian director and a US shareholder; however, “relative” under Section 92A covers some relationships, but “brother-in-law” is not specifically covered as a “relative” for control purposes in the context of transfer pricing. Unless there is actual influence over management or policy decisions, this relationship alone won’t make the companies AEs.
Merely having overlapping or similar company names or single-client concentration does not establish AE status unless accompanied by direct/indirect participation in management/control/capital.

Dhirajlal Rambhia

SEO Sai Gr. Hosp.

208015 Points Joined July 2016

Section 92E and Form 3CEB become applicable when an international transaction is undertaken with an AE.
If, on facts, the companies are not “AEs” under Section 92A, transfer pricing documentation, Section 92E reporting, and Form 3CEB are NOT required, even if the US company is the sole client.
Indian tax authorities may scrutinize single-client captive models, so robust documentation demonstrating arm’s length transactions is advisable.
Based on current facts, the US company does NOT qualify as an AE to the Indian company under Section 92A, so 92E and Form 3CEB do NOT apply at present.