LCS ACA
2050 Points
Joined September 2007
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.