Rohit Singhal
Asked June 18, 2016

indian law on subsidiary company

  • 1 Answer
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indian subisdiary of foreign holding. doing only trial of medicines nd nothing else and pay salary to employee hired, whether all payment considered as capital and whether transfer pricing and dta rule apply even when indian company have no business here only fund transfer for salary and expenses

Answer 1

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Rahul Singh

When two or more associated enterprises enter into a contract during a global transaction in order to allocate certain funds that reduces the service or manufacturing costs or increases the profit margin of one or all the companies then such a cost is calculated taking into account the arm’s length price of the particular assistance, service or facility as applicable. Here the Indian subsidiary is assisting its foreign parent holding by conducting the trials of medicine and establishing the service in India is reducing the company’s overall drug manufacturing costs.

Transfer pricing is applicable on all international transactions.

An international Transaction is defined as any transaction between two or more associated companies situated in different countries in terms of a property that is tangible or intangible, a service offered by the company, or any form of lending of money, etc. It is compulsory that at least one of the participants involved in the transaction is a non-resident of India. However, a transaction that has been carried out by two non-resident Indians, where one of them possesses a permanent setup in India and whose income is taxable from India, such a type of transaction is also considered as ‘International Transaction.’[1]

Here the Indian subsidiary is providing its service by doing clinical trials of drugs and in return funds are allocated from the parent holding for salaries of employees hired or other necessary expenses. So this transaction of money from the foreign holding and its Indian subsidiary for the salaries of its employees will be considered as capital as it is spent to perform a necessary step of drug manufacturing which is clinical trial of drugs and this transaction also comes under the purview of International transaction and hence rules of transfer pricing and data will apply here.

Average of percentage of expenditure incurred by 17 pharmaceutical companies on advertisement and marketing and no analysis as to type of drug, nature of market, period of advertisement was held non Transactional net margin method by the Mumbai ITAT in ACIT V. Genome Biotech (P.) Ltd[2].

Here the company is assessing the nature of drug through the tests conducted by its subsidiary and it is adding in the reliability of that particular company’s product and hence finally the value of the product is enhanced so it is coming under TNMM.

 

                 http://www.transferpricing-india.com/faq.html

 

                 Genom Biotech Pvt. Ltd , vs Department Of Income Tax, 2012

 

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