CBDT notifies tolerance range for Variation between ALP and international transaction price

The Central Board of Direct Taxes(CBDT) has notified that Variation between ALP and international transaction price should exceed one per cent via issuing Notification.

The concept of arm’s length takes its meaning from the independent relation shared by two separate parties. Unlike business transactions between related parties, transactions between unrelated parties are done at an open market price, and so Arm’s Length Price (‘ALP’) indicates the price that should have been paid between related parties if those parties were not related to each other.

The whole Transfer Pricing Mechanism is based on the estimation of revenue coming from cross-border transactions using the arm’s length price under Indian Transfer Pricing rules. According to the Organisation for Economic Co-operation and Development (‘OECD’) Transfer Pricing Guidelines, an ALP is a price at which transactions between people other than connected firms are carried out under unregulated conditions.

In general, the Indian Transfer Pricing Regulations include extensive definitions of terminology such as Associated Enterprise (‘AE’) and International Transactions, which are used in the transfer pricing method. In other words, understanding the notion of AE and International transactions is necessary for estimating Arm’s length pricing.

The Notification Stated as, “In exercise of the powers conferred by the third proviso to sub-section (2) of section 92C of the Income-tax Act, 1961 (43 of 1961)(hereafter referred to as the said Act) read with proviso to sub-rule (7) of rule 10CA of the Income-tax Rules, 1962, the Central Government hereby notifies that where the variation between the arm’s length price determined under section 92C of the said Act and the price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed one per cent. of the latter in respect of wholesale trading and three per cent. of the latter in all other cases, the price at which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm’s length price for assessment year 2023-2024.”

Explanation.- For the purposes of this notification, “wholesale trading” means an international transaction or specified domestic transaction of trading in goods, which fulfils the following conditions, namely:-

(i) purchase cost of finished goods is eighty per cent. or more of the total cost pertaining to such trading activities; and

(ii) average monthly closing inventory of such goods is ten per cent. or less of sales pertaining to such trading activities.

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