Govt brings range concept in transfer pricing calculation

The government on Tuesday notified amendments to the transfer pricing rules to incorporate a "range concept" to align transfer price calculations with that of international best practices.

The amended regime will be applicable for computation of arms length pricing (ALP) of international transactions and specified domestic transactions undertaken on or after April 1, 2014, a finance ministry press release states.

"The use of range concept, being a statistical tool, enhances the reliability of analysis undertaken for computation of ALP," it said.

The amended rules allow for introduction of a "range concept" for determination of ALP and "use of multiple year data" for undertaking comparability analysis in transfer pricing cases.

The range concept will be applicable in certain cases for determining the price and will begin with the 35th percentile and end with the 65th percentile of the comparable prices.  Transaction price shown by the taxpayers falling within the range will be accepted and no adjustment will be made. The use of multiple year data allows for yearly variations to be averaged out and would therefore add value to transfer pricing analysis.

The amended rules are expected to provide clarity in determination of prices in transfer pricing cases and reduce disputes. "It is a part of the government's continuing initiative of providing a stable and certain direct tax regime", the statement said.

The Income-tax Act provides for determination of income having regard to ALP in case of international transactions and specified domestic transactions. The provisions of the Income-tax Act were amended through the Finance (No.2) Act, 2014 to facilitate alignment of Indian transfer regime with international best practices. The manner of computation of ALP is laid down under the income-tax rules.