Any income arising from an international transaction will be computed having regard to the arm’s length price under section 92(1) of income tax act. In computing such income, the allowance for any expense or interest arising from an international transaction will also be determined having regard to the arm’s length price.
Where in an international transaction, two or more associated enterprises enter into a mutual agreement or arrangement for allocation or appointment of any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided to any one or more enterprises, the cost of expenses allocated or appointment, contributed by any such enterprises will be determined having regard to the arm length price of such benefit under section 92(1) of income tax act.
Non applicability of the scheme:- in these cases this scheme will not be applicable under section 92(3) of income tax act. Where computation of the income allocated has the effect of reducing the income chargeable to tax or increasing the loss, computed on the basis of entries made in the books of account in respect of the previous year in which the international transactions was entered into, in these cases the section 92(1) will not apply.
Meaning of arm’s length price:- arm 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 under section 92F(ii) of income tax act. Thus a price at which independent enterprise deal with each other should be reckoned as the arm’s length price. Such price is determined by market forces.
The arm’s length price in relation with international transaction will be determined by the most appropriate method having regard to the nature of transaction or class of associated persons or functions performed by such persons or such other relevant factors.