Updated on July 18, 2023
As per the provisions of the Income Tax Act, 1961, a company is only eligible for expense deductions if it can substantiate that it has obtained a tangible and quantifiable advantage resulting from the services provided by the related company. Therefore, the benefit test refers to the assessment conducted by tax authorities to determine whether a company is eligible to claim deductions for certain payments made to a related company within a multinational group. The test examines whether the company has actually received a tangible and measurable benefit from the expenses incurred by the related company in providing intra-group services. In simpler terms, it ensures that deductions are allowed only if there is evidence of a real advantage conferred upon the company claiming the deduction.
Why is a benefit test needed?
The benefit test is needed to ensure that companies can only claim deductions for expenses that have provided them with a real advantage or benefit. It helps prevent companies from manipulating payments within multinational groups solely to reduce their taxable income, ensuring that deductions are based on legitimate transactions and actual benefits received. This test ensures fairness and prevents misuse of tax deductions.