Reporting of Transactions Not at Arm’s Length Price with Related Parties
Transactions with related parties must generally be carried out at an Arm’s Length Price (ALP)—that is, the price that would have been charged between independent, unrelated parties under similar conditions. When transactions are not at arm’s length, special reporting and tax adjustments are required.
Below is a clear and practical explanation (Indian context):
1. What is a Related Party?
Related parties include:
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Directors, partners, relatives
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Holding, subsidiary, or associate companies
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Entities under common control
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Specified persons under Income Tax Act, Section 40A(2)(b)
2. What is a Non–Arm’s Length Transaction?
A transaction is not at arm’s length when:
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Goods/services are sold below or above market price
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Interest-free or low-interest loans are given
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Excessive salary, commission, rent, or fees are paid
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Purchases are made at inflated prices
Example:
Market rent = ₹50,000 per month
Paid to related party = ₹1,00,000 per month
➡ Excess ₹50,000 is non–arm’s length
3. Legal Provisions for Reporting (India)
(A) Income Tax Act
🔹 Section 40A(2)
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Applicable to domestic related party transactions
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Excess or unreasonable expenditure can be disallowed
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Assessed based on fair market value
🔹 Transfer Pricing (Sections 92–92F)
Applies when:
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International transactions, or
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Specified Domestic Transactions (SDT) exceed prescribed limits
4. Mandatory Disclosures & Forms
✅ Form 3CD (Tax Audit Report)
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Clause 23: Related party payments
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Auditor reports:
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Nature of transaction
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Amount paid
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Name of related party
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✅ Form 3CEB
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Required for transfer pricing cases
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Certified by a Chartered Accountant
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Details of ALP computation
✅ Financial Statements
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Disclosure under AS 18 / Ind AS 24
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Nature of relationship and transaction value must be disclosed
5. Consequences of Non-Arm’s Length Pricing
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Disallowance of excess expense
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Increase in taxable income
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Interest and penalties
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Transfer pricing adjustments by tax authorities
6. How to Ensure Compliance
✔ Maintain market price evidence
✔ Keep agreements and benchmarking documents
✔ Proper disclosure in tax audit & financials
✔ Apply arm’s length methods (CUP, TNMM, etc.)
7. Simple Example
Company pays ₹5,00,000 salary to director
Market salary = ₹3,00,000
➡ ₹2,00,000 may be disallowed as excessive
✅ Conclusion
Transactions with related parties must be fairly priced and transparently reported. If not at arm’s length, they attract disclosures, adjustments, and tax consequences. Proper documentation and reporting are essential to avoid disputes.
If you want, I can:
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Explain
What is GST (Goods and Services Tax)?
GST is a single indirect tax introduced in India on 1 July 2017. It replaced multiple indirect taxes like VAT, Service Tax, Excise Duty, etc. GST is levied on the supply of goods and services and is collected at each stage of value addition.
Types of GST:
- CGST – Central GST (collected by Central Government)
- SGST – State GST (collected by State Government)
- IGST – Integrated GST (on inter-state supply)
Benefits of GST:
- One nation, one tax
- Reduces tax burden
- Transparent tax system
- Input Tax Credit (ITC) available
- Boosts ease of doing business
What is the Composition Scheme under GST?
The Composition Scheme is a simplified GST scheme for small taxpayers to reduce compliance burden.
Who can opt for Composition Scheme?
- Businesses with annual turnover up to ₹1.5 crore
- For special category states, limit is ₹75 lakh
Tax Rates under Composition Scheme:
- Manufacturers & Traders: 1% (0.5% CGST + 0.5% SGST)
- Restaurants (no alcohol): 5%
- Service providers (special scheme): 6%
Key Features:
- Pay GST at a fixed lower rate
- Quarterly return instead of monthly
- Less paperwork
- No need to maintain detailed records
Limitations:
- Cannot collect GST from customers
- Cannot claim Input Tax Credit (ITC)
- Cannot do inter-state supply
- Not suitable for e-commerce sellers
Difference between Normal GST & Composition Scheme
| Basis | Normal GST | Composition Scheme |
|---|---|---|
| Tax Rate | As per GST slabs | Fixed lower rate |
| ITC | Allowed | Not allowed |
| Returns | Monthly | Quarterly |
| Compliance | High | Low |
| Inter-state supply | Allowed | Not allowed |
If you want this in 100 words, Hindi version, exam-ready notes, or a comparison chart, tell me 😊
Composition Scheme And GST
Here is a clear and exam-ready explanation of Composition Scheme and GST (India):
GST (Goods and Services Tax)
GST is an indirect tax implemented in India from 1 July 2017. It is levied on the supply of goods and services and has replaced many indirect taxes like VAT, Service Tax and Excise Duty. GST is a destination-based tax and helps create a unified national market.
Types of GST:
- CGST – Central Goods and Services Tax
- SGST – State Goods and Services Tax
- IGST – Integrated Goods and Services Tax
Composition Scheme under GST
The Composition Scheme is a simplified GST scheme designed for small taxpayers to reduce compliance and tax burden.
Eligibility:
- Annual turnover up to ₹1.5 crore (₹75 lakh for special category states)
Tax Rates:
- Manufacturers/Traders – 1%
- Restaurants (no alcohol) – 5%
- Service providers – 6%
Features:
- Lower tax rate
- Quarterly returns
- Minimal record-keeping
Restrictions:
- No Input Tax Credit (ITC)
- Cannot collect GST from customers
- No inter-state sales
In short, GST simplifies taxation, while the Composition Scheme helps small businesses comply easily with GST laws.
If you want this in Hindi, 100 words, or with a comparison table, let me know.
GST stands for Goods and Services Tax. It is an indirect tax system implemented in many countries, including India. GST replaces multiple indirect taxes levied by the central and state governments, simplifying the taxation process. Under GST, goods and services are taxed at different rates based on classification. It is a destination-based tax, which means that the tax is collected at the point of consumption rather than at the point of origin.
The GST system is designed to eliminate the cascading effect of taxes, also known as tax-on-tax, by allowing businesses to claim input tax credits on the taxes paid at earlier stages of the supply chain. This ensures that the tax is levied only on the value added at each stage of production and distribution. GST has several benefits, including simplifying the tax structure, reducing tax evasion, eliminating double taxation, and promoting seamless interstate trade. It also provides a uniform tax structure across the country, making it easier for businesses to comply with tax regulations.
Overall, GST aims to create a more efficient and transparent tax system, benefiting both businesses and consumers while contributing to the country’s economic growth.
Understanding the Full Form of GST
The full form of GST is Goods and Services Tax. GST is an indirect tax system implemented in many countries, including India. It is a comprehensive tax levied on the supply of goods and services at each stage of production and distribution.
The acronym “GST” represents the key components of this tax system:
- Goods: Refers to physical or tangible products that are traded or supplied
- Services: Refers to intangible activities or tasks provided for consideration, such as professional services, entertainment, or hospitality.
- Tax: Represents the levy or charge imposed by the government on the supply of goods and services.
GST replaces indirect taxes previously levied by the central and state governments, such as excise duty, service tax, VAT (Value Added Tax), and others. It aims to streamline the tax structure, reduce complexities, and create a uniform tax regime nationwide.
By unifying multiple taxes under a single umbrella, GST simplifies business compliance, reduces tax evasion, and promotes the ease of doing business. It also facilitates the seamless movement of goods and services across state borders, promoting a unified national market.
Implementing GST has significant implications for businesses, consumers, and the economy. It can potentially enhance tax revenues, boost economic growth, and create a transparent and efficient tax system that benefits all stakeholders.
An Income Tax Return or ITR is a statement of your income and tax liability for a particular year that you file with the government. This statement provides information about the assessee’s total income, expenses, assets and tax payable thereon.
An ITR is required to be furnished by everyone who is mandated by certain conditions, every year within the due date. The due date for filing income tax return for individuals not liable to tax audit is 31st July of the next financial year. If ITR is not filed within due date, of the tax payer should pay late filing interest and penalty as the case may be.
This article will discuss in detail the conditions mandating the assessee to file a tax return, why a tax return must be filed and the consequences of not filing a tax return.
What is ITR?
- ITR stands for Income Tax Return.
- As previously mentioned, it is a formal statement filed by the taxpayer which contains the income earned, the deductions claimed and taxes payable, along with important disclosures as necessary.
- Income Tax Return is mandatory for satisfaction of certain conditions, and is optional for others.
- ITR can be filed even if the tax liablity is nil for the assessee.
Who are required to File ITR?
Income Tax Return filing is mandatory in India for a person who fulfils any of the following conditions:
If your Total Income is more than the Tax-Free Limit
Any person whose total income in a year exceeds the basic exemption limit, otherwise the tax-free limit must mandatorily file an ITR irrespective of a tax liability or not.
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