Tolerable limit for determination of Arm Length Price changed

Tolerable limit for determination of Arm Length Price with respect to international transactions and specified domestic transaction has been notified separately for “wholesale trading” and “cases other than wholesale trading” at the rate of 1% and 3% respectively.

The “arm’s length principle” of transfer pricing states that the amount charged between related parties for a given product must be the same as if the parties were not related. An arm length price for a transaction is therefore what the price of that transaction would be on the open uncontrollable market. For commodities, determining the arm’s-length price can sometimes be as simple a matter as looking up comparable pricing from non-related party transactions, but when dealing with proprietary goods and services or intangibles, arriving at an arm’s length price can be a much more complicated matter.

In the practical scenario, it is not possible to testify the arm length principle wholly based on that the the amount charged between related parties will be exactly the same as the amount charged between the unrelated parties. So to resolve this issue in practical environment, a tolerable limit concept has been introduced before triggering arm length price.

Earlier second proviso to sub-section (2) of section 92C of Income Tax Act, 1961 states that if the variation between the arm’s length price so determined and price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed three per cent of the latter, the price at which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm length price.

In other words, arm length prices shall be trigger only when, the variation between arm length price and actual price of international/specified domestic transaction exceed 3% of actual price.

Further the above mentioned section also provides the Explanation for the removal of doubts,that the provisions of the second proviso shall also be applicable to all assessment or reassessment proceedings pending before an Assessing Officer as on the 1st day of October, 2009. Hence, the tolerable limit benefit also applicable to the pending cases as on 1/10/2009.

Now the above provision has been amended vide notification no. 45/2014 dated 23rd September,2014 :-

Amended second proviso to sub-section (2) of section 92C of Income Tax Act, 1961 states that where the variation between the arm’s length price so determined and price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed one percent of the latter in respect of wholesale trading and three percent of 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 length price for assessment year 2014-15.

Further notification also provides the explanation for the word “Wholesale Trading” :-

Wholesale trading means an international transaction or specified domestic transaction of trading in goods, which fulfills the following conditions, namely:-

  1. Purchase cost of finished goods is 80% or more of the total cost pertaining to such trading activities; and
  2. Average monthly closing inventory of such goods is 10% or less of sales pertaining to such trading activities.

Refer notification 45/2014

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