arm's length transaction

Arm's Length transaction means a transaction with related party like associate enterprise or branch deal as to with unrelated party.  e.g. The amount charged by one related party to another for a given product must be the same as if the parties were not related.

it is a transaction between two related parties conducted in the manner as if dey were unrelated or  transaction between two othewrwise unrelated or affiliated parties.....tats an arm length transaction....

I would like to explain the meaning by an example

Lets suppose there is a Foreign Co. X; It has a branch or associate company Y in india. Thus X & Y are related companies. Now the indian company manufactures a product and supplies it to X for Rs.200 whereas the same product is supplied by Y to other unrelated company Z for Rs. 500

Thus due to less price charged by Y to X, sales of Y will reduce resulting in loss of revenue to India.  Now if AO feels that the price was unreasonably low, he can re-estimate the price of sale transaction between X-Y on the basis of transaction between Y-Z. (However there are some adjustments to be made)

This reestimation of transaction is known as arms length transaction.

Another example can also be that of purchase by Indian company i.e. if indian company purchases goods from american co. for Rs. 8000  whereas the cost of such goods for unrelated party is 5,000; then its cost will increase by 3000 resulting in loss to india.  Again if AO thinks that such purchase is at unreasonably high price he can reestimate this purchase transaction.

thankyou ashish, anand and mohit..

The arm's length principle is the condition or the fact that the parties to a transaction are independent and on an equal footing. Such a transaction is known as an "arm's-length transaction". It is used specifically in contract law to arrange an equitable agreement that will stand up to legal scrutiny, even though the parties may have shared interests (e.g., employer-employee) or are too closely related to be seen as completely independent (e.g., the parties have familial ties).

Fine, Related party in the sence of Partnership Partners are relatives.  If we sale our partners with lesser price (30/-) and more (70/-) to the others, then the tax authorities will treat it as an arms length transaction and the differencial price (40/-) treated as ur income, Sec.40A(2).

The fair market price of a particular transaction is its Arm's Length price.!!!!!!!!!!!!