Arms’ Length Principle
- The ARM’s length principle is the fundamental principle within transfer pricing. The Arm’s Length Principle basically stipulates that related parties shall deal with each other as if they were unrelated parties.
- The principle of arm’s length stipulates that the relation between the parties should not affect the price at which transaction is entered.
- Commercial transaction that can be conducted between related parties are the supply of goods, supply of services, loans, guarantee, fees, royalty transactions, sale of assets, etc.
Definition Of Arm’s Length Price [Section 92F]
The concept of an arm’s length price in a transaction, is that the price should be determined to protect the best interest of both the parties in a transaction as if, they are unrelated.
Section 92F(ii) of the Income Tax Act, 1961 defines arm’s length price to mean a price –
- Which is applied or proposed to be applied in a transaction – This implies that the arm’s length price can be applied to an existing or a future transaction;
- Transaction is between person other than AEs – The person should not be either: –
- Associated enterprise
- Deemed associated enterprises as per Section 92A;
- Transaction is entered in uncontrolled conditions, i.e., the conditions should not have been suppressed or controlled in a manner so that certain predetermined results are obtained.
Arm’s Length Price (“ALP”) provides a benchmark against which transactions between Associated Enterprise can be compared.