India specifies transfer pricing arm’s length tolerance range

By Gaurav Jain, Chartered Accountant & Priya Bhutani, New Delhi, India

India’s transfer pricing rules set an acceptable tolerance range for the variation between the arm’s length price and the transaction price.  In a September 13 announcement, India’s Central Board of Direct Taxes (CBDT) announced that that the prevailing 1% tolerance range for wholesale trading and the 3% range for all other international transactions and for specified domestic transactions will be retained.

This range will be applicable to all transactions undertaken during financial year ending 31 March 2019, the CBDT said in the new guidance, Notification No.  64/2019/F. No. 500/1/2014-APA-II.

Wholesale trading

According to the notification, to qualify as “wholesale trading,” the purchase cost of finished goods must be 80 percent or more of the total cost pertaining to such trading activities. Further, the average monthly closing inventory of such goods must be 10 percent or less of sales pertaining to such trading activities.

Similar to previous years, no specific explanation or clarification has been provided regarding why wholesale traders have a different tolerance range. Since the range prescribed for wholesale trading companies is very narrow it provides limited benefit to this class of taxpayers.

Interquartile range versus arithmetic mean

To establish an arm’s length price, Indian transfer pricing rules prescribe a range of the 35th to the 65th percentile. However, the range concept is not applicable in certain circumstances. In these cases, the arithmetic mean is used to measure the arm’s length price and the tolerance range, as described above, is brought into play

Other countries prescribe a wider interquartile range as a measure of the arm’s length range in all cases. The concept of arithmetic mean and tolerance range is not used in any other country.

The current government has always advocated in favour of reduced litigation and simplification of processes that cause undue hardship to taxpayers.

 By retaining the tolerance range, the Indian government has provided a modest leeway to taxpayers.

There are high expectations that the government will renew the safe harbour rules adding redefined eligibility criteria and thresholds to benefit small and medium enterprises. These rules have not yet been announced.

Gaurav Jain

Gaurav is a Chartered Accountant having more than 15 years of post-qualification experience in the field of transfer pricing, also having worked on a wide range of inbound and outbound investment structuring.

He has extensive experience in the sectors of Natural resources, manufacturing, real estate, IT/ITES and auto ancillary. His areas of expertise include documentation, including CbCR, Master File and Local File, TP Planning and restructuring and litigation for a number of renowned multinational and Indian companies.

Gaurav has also represented various complex transfer pricing matters before the Indian tax authorities, also assisting in dispute resolution through Advance Pricing Agreements. He has also twice served as member of Committee on International Taxation, Institute of Chartered Accountants of India.

Gaurav Jain

Walker Chandiok & Associates

L 41, Connaught Circus, New Delhi
110 001, India
+91 11 4278 7070
https://www.grantthornton.in/

Priya Mani Bhutani

Priya has more than 9 years of experience in the field of transfer pricing. She holds a Master’s degree in Economics and Bachelors in Economics and Management.

She has experience in transfer pricing documentation and compliance services, including CbCR and Master File and has also assisted clients in transfer pricing assessments and planning assignments. She has serviced conglomerates from the IT/ ITeS, Auto, Natural resources, real estate and Industrial goods manufacturing and trading sectors.

Priya has represented cases before the Transfer Pricing Officers and has assisted in representation before the DRP, CIT(A) and ITAT. Her experience also includes assisting clients with litigation avoidance mechanisms such as Advance Pricing Agreement and Safe Habour.

Priya Mani Bhutani

Walker Chandiok & Associates

L 41, Connaught Circus, New Delhi
110 001, India
+91 11 4278 7070
https://www.grantthornton.in/

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