The budget speech of the Finance Minister in 2014 referred to the concept of range and use of multiple year data to align Indian Transfer Pricing regime with international best practices.
The Central Board of Direct Taxes (CBDT) in May 2015 issued a draft scheme proposing the aforesaid concepts and suggestions were invited from the stakeholders.
On the basis of the feedback received, the CBDT has now amended (vide Notification No. 83/2015 dated 19 October 2015) the Rules for determining the arm's length price (ALP) by introduction of 'Range concept' and 'Use of Multiple year data' for comparability analysis. The amended Rules is applicable to both international transactions as well as specified domestic transactions ('transactions').
Use of multiple year data (current year and preceding two financial years) is permissible only in case of specified methods of determining ALP. In such cases, the weighted average price of the comparable entities has to be computed in a specified manner and shall be used to benchmark the transactions entered into by the taxpayer. In cases where the list of comparables consists of less than six entities, the arithmetical mean of such weighted average will be regarded as ALP. It is expected that the use of multiple year data would even-out the variations in the analysis of the transactions.
Under the range concept, if the price at which the transaction has been undertaken is within the range, such price shall be deemed to be ALP and no adjustment will be made. The range concept will be applicable only in case of specified methods of determining ALP and where the list of comparables consists of six or more entities. The range will begin with the 35th percentile and end with the 65th percentile of the list of entities. When the price at which the transaction has been entered into does not fall within the range, the median of the list will be taken as ALP.
The amended Rules will be applicable for computation of ALP of transactions undertaken on or after 1 April 2014 i.e. from AY 2015-16.
The amended Rules may assist the taxpayers in benchmarking its transactions in a more scientific manner and consequently may reduce litigation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
