Concept of “Range” and Use of “Multiple Year Data” for computation of arm’s length price (‘ALP’) are proposed to be introduced in Indian Transfer Pricing Regime for transactions undertaken by the person on or after 01 April 2014 by way of Amendment in Income Tax Rules, 1962. In this regards, Ministry of Finance has published Scheme_ALP_InternationalTran21052015 on www.finmin.nic.in for comments and suggestion of the stakeholders and general public.
Salient Features of the Draft Scheme for Computation of ALP is as under:
A) Adoption of Range Concept:
- Concept of Range to be applicable in cases where ALP is determined by application of Transaction Net Margin Method (‘TNMM’), Resale Price Method (‘RPM’) or Cost Plus Method (‘CPM’);
- Minimum 9 entities shall be required to be selected as comparable entities based on Functions, Assets and Risk Analysis (‘FAR Analysis’);
- 3 years weighted average data 9 or more entities would be considered to construct the set and in certain circumstances such as Start-Up Operations in any of the previous two year or closure of operation in the current year, two years data could be used;
- For Calculation of Weighted Average, the numerator and denominator of Chosen Profit Level Indicator (‘PLI’) would be aggregated for all the years for every comparable entity and margin would be computed accordingly;
- Data points lying between the 40th to 60th Percentile shall be of the series shall constitute the arm’s length range; If the transfer price falls outside the range, median of the of the range would be taken as ALP and no range adjustment shall be allowed. Further, there shall not be two different sets for testing and making adjustment
B) Use of Multiple Year Data:
- Concept of Use of Multiple Year Data to be applicable in cases where ALP is determined by application of Transaction Net Margin Method (‘TNMM’), Resale Price Method (‘RPM’) or Cost Plus Method (‘CPM’);
- Three years shall comprise of the year in which the International Transaction or Specified Domestic Transaction has been undertaken and two preceding years.
- In case off non-availability of data for three years i.e. data for current year not available at the time of filing of Transfer Pricing Audit Report in Form 3CEB or a comparable may fail to clear quantitative filter in one of the three years or comparable has commence operations in the last two years or comparable has closed down its business operations in the current year, then use of two years data of the relevant three years shall be allowed.
- Data for current year can be used by the tax-payer as well as the department at the time of transfer pricing scrutiny
C) Continued used of Arithmetic Mean
- Where the range concept does not apply, the arithmetic mean concept shall continue to be applied in the same manner as it applied before amendment to Section 92C of the Income Tax Act, 1961 by Finance (No.2) Bill 2014 along with benefit of tolerance range.
- Further, in cases where multiple year data is to be used, the arithmetic mean of the multiple year data of comparable shall be considered for computation of ALP.