Reporting of transaction with related parties not a

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:

• Directors, partners, relatives

• Holding, subsidiary, or associate companies

• Entities under common control

• 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:

• Goods/services are sold below or above market price

• Interest-free or low-interest loans are given

• Excessive salary, commission, rent, or fees are paid

• 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)

• Applicable to domestic related party transactions

• Excess or unreasonable expenditure can be disallowed

• Assessed based on fair market value

🔹 Transfer Pricing (Sections 92–92F)

Applies when:

• International transactions, or

• Specified Domestic Transactions (SDT) exceed prescribed limits

4. Mandatory Disclosures & Forms

✅ Form 3CD (Tax Audit Report)

• Clause 23: Related party payments

• Auditor reports:

  • Nature of transaction

  • Amount paid

  • Name of related party

✅ Form 3CEB

• Required for transfer pricing cases

• Certified by a Chartered Accountant

• Details of ALP computation

✅ Financial Statements

• Disclosure under AS 18 / Ind AS 24

• Nature of relationship and transaction value must be disclosed

5. Consequences of Non-Arm’s Length Pricing

• Disallowance of excess expense

• Increase in taxable income

• Interest and penalties

• 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.

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