Can price be the criteria to judge whether a transaction is at arm’s length? Should every transaction be accompanied with a certificate from a valuer?
One may check if there are comparable products in the market. If yes, check the terms of sale/purchase, etc. of similar transactions and try obtaining quotes from other sources. Price in isolation cannot be the only criteria to judge whether a transaction is at arm’s length. Terms of sale such as credit terms should also be considered.
For Example, in case of trading of goods, X Ltd charged Rs 100 from both the related and unrelated parties. Based on this, it might seem to be a transaction at arm’s length. However, the credit period granted to an unrelated party was 15 days and to the related party was 6 months. Therefore, it cannot be considered as an arm’s length transaction. The transaction as a whole and the entire bundle of the terms and conditions needs to be considered for determining whether the transaction is on an arm’s length basis.
It is not mandatory to obtain a certificate from a valuer in every case but this is dependent on the policy of the company on transactions with related parties. There are different practices adopted by the Companies like obtaining a certificate from the internal auditors, certificate from management etc.
The Act does not prescribe methodologies and approaches which may be used to determine whether a transaction has been entered into on an arm’s length basis. Audit Committee may consider the parameters given in the company’s policy on transactions with related parties.
Also, in terms of Section 92F of the Income-tax Act, 1961, “arm’s length price” means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions.
Depending on the nature of individual transaction, any appropriate method may be used by the Audit Committee to arrive at a considered decision to determine arm’s length price.