Govt amends rules to reduce Transfer Pricing disputes

The new regime will be applicable for computation of ALP of international transactions and specified domestic transactions undertaken on or after April 1, 2014, a notification said.

In a positive signal to investors, the government has amended rules for determination of Arm’s Length Price (ALP) with aim to provide clarity in calculating prices in transfer pricing cases and reduce litigations.

The new regime will be applicable for computation of ALP of international transactions and specified domestic transactions undertaken on or after April 1, 2014, a notification 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 Finance Ministry said in a statement.

 

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

“The amended rules would therefore provide clarity in determination of price in transfer pricing cases and reduce disputes on transfer pricing (TP) issues. It is a part of the government’s continuing initiative of providing a stable and certain direct tax regime,” the ministry said.

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 ministry said.

The use of multiple year data allows for yearly variations to be averaged out and would therefore add value to transfer pricing analysis.

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 Act were amended through the Finance 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.

TP refers to the practice of computing arm’s length price for transactions between group companies in different countries for determining profit and levying of taxes.

SP Singh Senior Director at Deloitte India said it would “change the approach to transfer pricing audit in India and would send a very positive message to investors interested in India.”

As per a Deloitte and Taxsutra report on ‘Transfer Pricing Disputes and Trends 2015’, India in 2001 became only the third developing country to introduce a TP legislation.

TP adjustments at first increased progressively and then in geometric proportions, the report said, adding “at one point doubling every year and reaching a peak of Rs 70,000 crore (FY 13), until an outcry from foreign investors restored some semblance”.

The figure stands at a still high figure of Rs 46,000 crore in 50 percent of the 2,300 odd cases selected for scrutiny.

 

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