1. 439International Taxation Vol. 12 May 2015 83
G
iven the heavy influx of foreign investments into India
in the last couple of decades, transfer pricing (TP)
regulations were introduced in India in the year 2002.
The primary objective behind this far impacting move
was to ensure transparency and facilitate arm’s length pricing of
international transactions entered into by Indian corporate entities
with their overseas related parties. The law evolved and matured
with time, and the natural progression was to then extend it to
domestic transactions (i.e. transactions entered into between related
Indian corporate entities) as well. The pulse of evolution has
continued since, and recently, in a bid to strengthen corporate
governance, enhance self-regulation and protect investor interests,
the Companies Act, 2013 (2013 Act) introduced certain compliances
with respect to related party transactions (RPT). Keeping these
objectives in perspective, Securities and Exchange Board of India
(SEBI) has also made certain amendments to the Equity Listing
Agreement (SEBI ELA) with respect to RPT.
It has been almost a year since the introduction of the aforesaid
regulations. However, as of date, there is lack of adequate and
conclusive clarity on a few critical aspects of these regulations.
Accordingly, left with little choice, corporates are trying to comply
with these provisions based on a general understanding so developed
(keeping in perspective the objective of the introduction of such
provisions). Though the Government and SEBI have issued a few
clarifications on this subject in the last few months, these were
largely directed towards relaxing certain compliance requirements
and aligning the two regulations better.
Related party
transactions –
Corporate governance
perspective
Shuchi Ray*
Nimisha Parikh**
Vijay S. Shah***
* Shuchi Ray, Director, Deloitte Touche Tohmatsu India Private Limited.
** Nimisha Parikh, Manager, Deloitte Touche Tohmatsu India Private Limited.
*** Vijay S Shah, Manager, Deloitte Touche Tohmatsu India Private Limited.
- Information for the editor for reference purposes only
TRANSFER PRICING

2. 440 International Taxation Vol. 12 May 2015 84
Given the above background, the underlying
intent of this article is to throw light upon
and discuss some of the recent developments
and practical considerations while complying
with RPT provisions under 2013 Act and
SEBI ELA.
One of the recent developments relates to
the amendment to the definition of “related
party” under SEBI ELA. The existing definition
includes related parties covered under 2013
Act or applicable accounting standards (i.e.
AS 18).
The Ministry of Corporate Affairs, Government
of India (MCA) has recently issued the
Companies (Indian Accounting Standards)
Rules, 2015 whereby the Indian Accounting
Standard (Ind AS) would be mandatory for
the specified class of companies for accounting
period beginning on or after 1 April 2016/1
April 2017. However, a company may adopt
Ind AS for Financial Year (FY) commencing
on or after 1 April 2015 i.e. for FY 2015-16.
Ind AS 24 “Related Party Disclosures” provides
a new definition of “related party” which is
different from that provided by AS 18. Since,
the current definition of “related party” under
SEBI ELA makes a reference to the applicable
accounting standards, reference will need to
be made to Ind AS 24 which provides the
following definition:
A related party is a person or entity that
is related to the entity that is preparing
its financial statements (referred to as
the ‘reporting entity’).
(a) A person or a close member of
that person’s family is related to
a reporting entity if that person:
(i) has control or joint control of
the reporting entity;
(ii) has significant influence over the
reporting entity; or
(iii) is a member of the key manage-
ment personnel of the reporting
entity or of a parent of the
reporting entity.
(b) An entity is related to a reporting
entity if any of the following con-
ditions applies:
(i) The entity and the reporting entity
are members of the same group
(which means that each parent,
subsidiary and fellow subsidiary
is related to the others).
(ii) One entity is an associate or joint
venture of the other entity (or
an associate or joint venture of
a member of a group of which
the other entity is a member).
(iii) Both entities are joint ventures
of the same third party.
(iv) One entity is a joint venture of
a third entity and the other
entity is an associate of the
third entity.
(v) The entity is a post-employment
benefit plan for the benefit of
employees of either the report-
ing entity or an entity related
to the reporting entity. If the
reporting entity is itself such a
plan, the sponsoring employers
are also related to the reporting
entity.
(vi) The entity is controlled or jointly
controlled by a person identified
in (a).
(vii) A person identified in (a)(i) has
significant influence over the
entity or is a member of the
key management personnel of
the entity (or of a parent of
the entity).
(viii) The entity, or any member of
a group of which it is a part,
provides key management per-
Transfer Pricing

3. 441International Taxation Vol. 12 May 2015 85
sonnel services to the reporting
entity or to the parent of the
reporting entity.
Considering the change in the scope of
definition of “related party” under Ind AS 24
as compared to AS 18, it may be necessary
for corporates to revisit the existing list of
“related parties”.
Applicability of provisions to private
limited companies
A draft notification for public comments was
released by MCA on 24 June 2014 stating
that section 188 (pertaining to related party
transactions) shall not apply to private
companies. The said proposed amendment
would have excluded private companies from
the compliances in respect of RPT provisions.
However, this draft notification has not
been placed before the Parliament and is
still at draft stage and yet to be notified.
Thus, currently, all the companies including
private companies need to comply with RPT
provisions under 2013 Act.
Alignment of 2013 Act and SEBI ELA
With a view to provide relaxation and align
the RPT compliances under the two regulations,
the Companies (Amendment) Bill, 2014 (Bill)
proposed the following amendments:
Requirement of shareholders’ prior ap-
proval by way of ‘ordinary resolution’
instead of ‘special resolution’
Consent of shareholders not required for
transactions between a holding company
and its wholly owned subsidiary
Empowerment to audit committee to
give omnibus approvals for RPT subject
to conditions
As of date, the aforesaid Bill has been passed
only by the Lok Sabha. The above amendments
will come into effect from date of notification
in Official Gazette when the Bill is passed
by the Rajya Sabha, is given the President’s
assent and notified in the Official Gazette.
Practical considerations
Now moving from developments to practical
considerations, the below section discusses
certain concepts/issues that one would generally
come across while dealing with the relevant
provisions under these regulations.
Ordinary Course of Business
While 2013 Act lays emphasis on the term
Ordinary Course of Business (OCB), no
guidance has been provided on the same.
Keeping in perspective corporate governance
as the objective, one may use the following
parameters for determining OCB:
Transaction carried out in the normal
course of business envisaged in accord-
ance with the Memorandum of Associa-
tion of the Company;
Transaction is frequent/regular/repetitive
in nature; or necessary for continuation
of business uninterruptedly; or
Transaction is common commercial cus-
tomary practice, etc.
In this context, Standard of Auditing 550
(Revised) Related Parties (‘SA 550’) may also
be referred that provides certain examples of
the transactions outside an entity’s normal
course of business viz. complex equity
transactions, such as corporate restructuring
or acquisition; transactions with offshore
entities in jurisdictions with weak corporate
laws; the leasing of premises or rendering of
management services by the entity to another
entity if no consideration is exchanged; sales
transaction with unusually large discounts or
returns; transactions under contracts whose
terms are changed before expiry.
Thus, while determining whether a particular
transaction is in ordinary course of business
or not, it is important to understand the
objective and mechanics of undertaking the

4. 442 International Taxation Vol. 12 May 2015 86
transactions. The above parameters could be
helpful on a case to case basis, however,
the intention of the parties is of paramount
importance.
Arm’s length
As per 2013 Act, the expression “arm’s length
transaction” means a transaction between two
related parties that is conducted as if they were
unrelated, so that there is no conflict of interest.
The regulations do not provide any specific
guidance vis-à-vis interpretation of the term
‘arm’s length transaction’. Nonetheless, keeping
in perspective the objective of 2013 Act (which
is to protect the interest of the company and
its shareholders and enhance self-regulation),
companies are expected to ensure that there
is no prejudice to shareholders of either of
the parties to the transaction and that such
transactions do not result in misstatement
of accounts.
Pricing, undoubtedly, is one of the aspects
while determining arm’s length basis for the
RPTs. To achieve the said objective, one may
rely upon the methodologies prescribed under
Indian TP regulations or the international TP
guidelines in this regard. Again, since the
objective to be achieved in the process is
self-regulation and corporate governance, it
is essential to demonstrate that the selection
of the related party and determination of
price is made systematically by the competent
management personnel, without any compulsion
or compromise.
Some of the indicative criteria based on which
a transaction may be considered to meet with
arm’s length standard are business rationale
for entering into transaction with related party,
pricing policy of the company and related
party, basis of pricing for an arrangement,
business and economic considerations, details
of similar transaction entered by the company
with third parties, general industry practice,
benchmarking analysis using external databases,
quotation obtained from vendors and technical
evaluation, etc.
Thus, for concluding arm’s length under 2013
Act, the above factors would play a key role.
Further, it would also provide the corporates
an opportunity to converge the compliances
under 2013 Act with Indian TP regulations.
Issue of Shares – Whether a related party trans-
action
Now moving to category of transactions, after
Mumbai High Court decision in the case
of Vodafone1
, it is clear that TP provisions
do not apply to issue of equity shares to a
non-resident. While analyzing the said issue
under 2013 Act, reference can be made to
section 188(1)(b) of 2013 Act i.e. selling or
otherwise disposing of, or buying, property
of any kind. Though the term ‘property of
any kind’ seems to indicate that all forms of
property, including intangible assets such as
intellectual property rights, may be covered
under section 188(1)(b), it would be pertinent
to examine whether shares at the time of
issue can be considered as property.
Based on certain judicial pronouncements2
, it
is noted that at the time of issue of shares,
issuer of shares receives money from the
subscriber in consideration of the shares
(which are allotted within prescribed time
limit). Till such allotment, the shares do
not exist as such and it is only at allotment
stage that the shares come into existence as
a property. Hence, a view may be taken
that share is not a property before allotment,
and accordingly, issue of shares is not a
transaction under 2013 Act.
Free of charge transaction - Whether a related
party transaction
2013 Act does not make any distinction
between transactions which are backed by a
consideration, and those which are not, i.e.
transactions which are free of cost. Thus, on
a plain reading of the definition of related
party transaction, it appears that free of cost
transactions, if covered by section 188(1),
would be covered under 2013 Act. Further, the
definition of RPT under SEBI ELA specifically
Transfer Pricing

5. 443International Taxation Vol. 12 May 2015 87
provides that a transaction between related
parties would be subject to RPT provisions
regardless of whether a price is charged.
Thus, a free of cost transaction undertaken
between related parties would be covered
under SEBI ELA if it involves transfer of
resources, services or obligations.
Loan by company (2013 Act and Indian TP regu-
lations)
Section 186(7) of 2013 Act states that “No
loan shall be given under this section at a rate
of interest lower than the prevailing yield of
one year, three year, five year or ten year
Government Security closest to the tenor of
the loan.”
Practically, Indian outbound companies give
loan to their overseas subsidiaries on the
basis of Libor plus certain margin (say, 150
bps or 200 bps, depending upon the currency
of loan, country and credit rating of the
borrower). Further, tax deduction in the
hands of borrower is also a factor which is
considered by corporates while finalizing the
rate of interest. Since most of the times, such
loans are denominated in foreign currency; the
effective rate of interest (Libor plus margin
money) will generally be lower than the rate
of yield from an Indian Government Security.
Thus, due to inherent contradiction, there
is a practical difficulty being faced by the
corporates in complying with the said provision
of 2013 Act. Various representations have
been made to the Government highlighting
such anomaly, however, till date there is no
clarity on this aspect.
A further deep dive into this section reveals
that section 186(7) does not explicitly state that
it should be the yield based interest rate of
Government security in India. Thus, uncertainty
arises as to whether term ‘Government’ relates
to the location of the borrower or location
of lender or where the loan is utilised. With
an objective of resolving the contradiction as
discussed above, a view may be taken that
the word ‘Government’ could be interpreted
to mean the ‘Government’ of the country
where the borrower is or where the loan
is utilised. The same would also be in line
with the generally accepted principles of
computing interest rate. However, in the
absence of any specific guidance/clarification,
it is recommended to seek legal advice for
interpreting the said term. In any case, the
rate of interest on the loan needs to comply
with the applicable exchange control regulations
and TP requirements besides 2013 Act.
Conclusion
While this specific move of the government
gives a big and tangible boost to the global
image of corporate India on the subject of
corporate governance, what one would also
have expected here is simplicity and optimal
clarity on the procedures/compliances. It
is beyond doubt that the increased focus
on corporate governance has definitely put
some additional pressure on the corporates
(compliance as well as administrative). They
are now required to closely review their
related party transactions not only from the
perspective of TP laws of the country, but also
from a corporate law and SEBI standpoint.
Their enhanced scope would include the
review of internal controls for identifying
related parties and related party transactions;
approval mechanism for RPTs and maintaining
a robust set of documentation in line with
the objective of corporate governance.
The Government has indeed taken a few
measures on the subject till date, and these
do help in overall better implementation.
However, a lot still needs to be done to
avoid hardship in practical implementation,
and non-compliances arising out of ignorance
and lack of clarity. Given that this is now an
interplay of three different statutes (TP law,
2013 Act and SEBI ELA) which are governed
by three different Government departments,
a harmonious, unambiguous and well laid
compliance mechanism for the same will only
make things simple and easier to comply
with. Adequate clarity around this will
facilitate better and higher compliance, and

6. 444 International Taxation Vol. 12 May 2015 88
this, for sure, will be a ‘win win’ situation
for one and all.
Hence, the recent steps taken by the Government
in this direction are laudable for sure. The call of
the hour now is for all those clarifications which
are required to put to rest the interpretational
controversies and procedural issues. While
corporate India eagerly waits for these, the
sooner this happens, the better.
฀
1. Vodafone India Services (P.) Ltd. v. Union of India [2014] 368 ITR 1/[2015] 228 Taxman 25/[2014] 50 taxmann.com 300 (Bom.).
2. Sri Gopal Jalan & Company v. Calcutta Stock AIR 1964 SC 250. Khoday Distilleries Ltd. v. CIT [2008] 307 ITR 312/[2009] 176 Taxman 142
(SC).
Transfer Pricing