Analysis of Final Rules issued by CBDT on ‘Range Concept’ & ‘Multiple year data’
The Central Board of Direct Taxes (CBDT) made amendments to the Indian transfer pricing rules by notification no 83/ 2015 dated 19 October 2015. These rules would be applicable to international transactions and specified domestic transactions that are entered into by taxpayers on or after 1 April 2014.
The CBDT released a draft scheme for the proposed rules on 21 May 2015 for obtaining public comments. The CBDT has now finalized the rules and has issued the final notification.
- The Range concept is applicable only in cases where Comparable Uncontrolled Price Method (CUP), Resale Price Method (RPM), Cost Plus Method (CPM) or Transactional Net Margin Method (TNMM) has been selected as the Most Appropriate Method (MAM)
- It is applicable if the number of comparables is 6 or more.
- For each comparable, data relating to the current year to be considered, however if the current year data is not available at the time of furnishing the return of income, the data pertaining to the immediately preceding financial year (to the current year) should be taken into consideration for analyzing the comparability of an uncontrolled transaction
- If the current year data, related to the relevant assessment year under consideration, becomes available during the course of assessment proceedings, such data shall be used irrespective of the fact that the same was not available at the time of furnishing the return of income of the relevant assessment year
- If a comparable is selected on the basis of preceding year data, but is not found to be comparable based on current year date for qualitative or quantitative reasons, then such comparable would need to be rejected from the data set
- A taxpayer is required to first compute the weighted average result of the data set. Where the data set consists of 6 or more comparables an arm’s length range based on the thirty-fifth percentile and sixty-fifth percentile of the dataset needs to be constructed. The Arms Length Price (ALP) would be any price which falls within this range. In case the taxpayer’s price is outside the range, the median of the range would be the ALP
- However, if the comparables are less than 6 or the method used is Profit Split Method (PSM) or Other Method, the arithmetic mean shall be applied along with tolerance band not exceeding 3% for determining the ALP
- The notification provide a few illustrations to explain the application of the process for computing ALP
The intent of CBDT to reduce litigation is very evident, however, the following aspects may create issues going forward:
- The use of current year data at the time of assessment is not in line with contemporaneous documentation requirements and the requirement that documentation should exist latest by the due date of filing the return of income [Rule 10D(4)]
- There could be issue in case the taxpayer has used range and selected 6 comparables filing of return of income, however, owning to quantitative or qualitative reason it may have to reject a comparable at the time of assessment. This may put at risk their documentation and price setting