Advisory On Related Party Transactions and Transfer Pricing
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Related Party Transactions - Companies Act 2013
The Companies Act, 2013 was introduced to motivate the companies to be on a “Jet Set Go” motto with compliance and transparency being the key. Among the multifarious issues outlined in this act, Related Party Transactions took a turn, and this is a term that has been making all companies edgy about the complexities surrounding it for umpteen years.
Who is a Related Party?
Following are the related parties with respect to Company LMN Ltd (LMN Ltd is taken as an example for explaining purposes). Let’s say, Mr L, M, and N are directors in this company. The related parties for the company, in general, are as under:
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S.NO
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Realated Parties
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Examples
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1.
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A director or his relative (Relative means a member of the same HUF, husband, wife, father, stepfather, mother, stepmother, son, stepson, son’s wife, daughter, daughter’s husband, brother, stepbrother, sister, step-sister)
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Mr L, Mr M and Mr N are directors and the relatives of these Directors are considered as related parties.
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2.
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Key managerial personnel or his relative
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Say, Mr O is a Company secretary, his relatives will be considered related parties
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3.
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A firm in which a director, manager, or relative is a partner
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Mr L is a partner at RST. Pvt. Ltd, another firm. This firm will also be considered as a related party.
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4.
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A private company in which a director, manager, or relative is a member or director
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Mr. M is a director in M Pvt Ltd – In this case M Pvt. ltd becomes a related party. Even when Mr. M’s relative is a member or director in M Pvt ltd, this company will be considered as a related party.
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5.
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A public company in which a director or manager is a director and holds along with his relatives more than 2% of its paid-up capital
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Mr. N along with his relatives holds more than 2% of the paid-up capital of N ltd. In this case, N Ltd will be considered as a related party.
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6.
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Any body corporate whose board of directors, MD or manager is required to act in accordance with the advice, directions or instructions of a director or manager (NA in cases when these directions are followed in a professional capacity)
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When P Ltd acts on the directions of Mr. L, P Ltd will be a related party.
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7.
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Any company which is a subsidiary of a holding company to which it is also a subsidiary
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PQR & LMN are both subsidiaries of ABC ltd. Thus, PQR also becomes a related party
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SEBI Governs Related Parties and Related Party Transactions
The SEBI Clause 49 also states certain regulatory requirements for related party transactions. It defines a related party transaction as a transaction that includes the transfer of resources/services/obligation.
Its scope is of a wider range than the Companies Act 2013. It includes close family members of directors or key managerial personnel, a private company in which directors or key managerial personnel plus their relatives have control or significant influence.
Every related party transaction which is material has to be approved by the shareholders by passing a special resolution and all related parties shall not be allowed to vote on such resolutions.
Important Pointers to Note
The turnover or net worth for the purpose of calculation under Companies Rules 2014 shall be based on the audited financial statements
If the transaction is in the ordinary course of business and done on an arm’s length basis it shall not require the approval of the board or the company.
No member shall vote on the special resolution if such member is a related party.
Details of every contract entered into shall find its reference in the Board’s report along with justification about the same
Ratification of the transaction may be done by the Board or the shareholders within three months. If the same is not done, then the contract will be voidable at the option of the Board.
If the contract is with anyone related to the director or is authorized by any other director, the directors concerned shall make good to the company for losses if any caused to the company.
Penalties outlined under Sec 188 are:
Listed Company: Imprisonment up to 1 year; fine ranging from Rs. 25000 to Rs. 500000 or both.
Any other company: Fine ranging from Rs. 25000 to Rs. 500000The meaning associated with this phrase related-party-transaction will keep clouding our minds and we hope to find some way to have a one-stop solution to put our perplexed minds to rest.
Transfer Pricing Advisory
The use of transfer pricing tax strategies has recently attracted a high level of international attention, due in part to the rapid rise of multinational trade, the opening of several significant developing economies and transfer pricing’s increased impact on corporate income taxation. As multinational corporations evolve into true global enterprises compliance with the differing requirements of multiple overlapping tax jurisdictions has become a complicated and expensive task.
With tax authorities’ ever increasing scrutiny of transfer pricing activity worldwide, we can assist you in the development of tax-efficient structures that increase compliance with legal requirements, evaluating your transfer pricing exposures for FIN 48 purposes, etc.
Our Transfer Pricing Services Include:
Transfer Pricing Documentation & Compliance Services (Filing of TP Report in Form 3CEB and preparation of TP Study Reports).
1.Transfer Pricing Services with respect to Benchmarking are carried out with a wide range of comparable company databases to find and identify the similar comparables for international transactions.
2. Transfer Pricing Assessment and representation before Transfer Pricing Officers (TPOs)
3. Transfer Pricing Appeals, Litigation and Alternative dispute resolution mechanisms such as DRP
4. Transfer Pricing related routine advisory
5. Transfer Pricing Planning
6. Due Diligence and diagnostic reviews related to transfer pricing in India
7. Transfer Pricing related structuring of transactions and Value Chain Transformation (VCTs)
8. Country by Country Report (CbCR) and Master File in accordance with Base Erosion and Profit Shifting (BEPS) Action Plan
9. Preparation of Profit Attribution Studies for Permanent Establishments (PEs)
10. Assistance in setting up a governance framework for determining arm’s length pricing, related party contracts consistent with Section 188 of the Companies Act 2013/Clause 49 of the SEBI listing guidelines
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