The Central Board of Direct Taxes (CBDT) has come up with draft rules so as to make ‘arm’s length pricing’ determination more reasonable in transfer pricing cases. This is sought to be achieved through the introduction of ‘range concept’ and ‘multiple year data’ comparisons.

Finance Minister Arun Jaitley had in July 2014 announced in his Budget speech that the ‘range concept’ would be introduced in the Indian transfer pricing regime. It was also announced that use of multiple year data would be permitted for undertaking comparability analysis.

The CBDT has now specified that ‘range concept’ can be used only in case the method used for determination of ‘arm’s length price’ is Transactional Net Margin Method (TNMM), Resale Price Method (RPM) or Cost Plus Method (CPM).

The data points lying within the 40{+t}{+h} to 60{+t}{+h} percentile of the data set of series would constitute the range, CBDT has said.

It has also said that multiple year data – comprising three years including the current year – would be used only in case determination of ALP is by these three methods.

In cases where ‘range’ concept does not apply, the arithmetic mean concept would continue to apply in the same manner as it applied before the amendment to income tax law (Section 92 C(2) by the Finance (No 2) Act 2014) along with benefit of tolerance range.

Reacting to the move, SP Singh, Senior Director-Transfer Pricing, Deloitte in India, said introduction of “arm’s length range” and “multiple year data” concepts is commendable.

“It will go a long way in reducing litigation considerably. With the development of data bases required for transfer pricing analysis, time had come to move away from the “arithmetic mean” concept and adopt the range concept which has greater acceptance”, Singh said.

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