SKP Tax Alert
22 May 2015 | Volume 8 Issue 6
Draft rules for the range concept and multiple year data unveiled

With the intention of aligning transfer pricing regulations in India with global best practices and reducing litigation considerably, Finance Minister, Arun Jaitley, in his Budget speech in July 2014, had announced the introduction of the 'range concept' for determining the arm's length price (ALP) and allowing the use of multiple year data for comparability analysis.
Consequently, section 92C(2) of the Income Tax Act, 1961 (ITA) was amended to allow taxpayers to determine the ALP (where more than one price exists) in relation to international transactions (ITs) or specified domestic transactions (SDTs) in the prescribed manner.
However, since then, there was no clarity on the use of multiple year data or the range concept.
Proposed provisions
On 21 May 2015, the Central Board of Direct Taxes (CBDT) released a draft scheme of the proposed rules for computation of ALP of ITs or SDTs, which is now open for public comments.
The manner of computation of ALP is proposed to be provided through an amendment in the Income Tax Rules. The benefit of range and multiple year data can be used only if the assessee has used a margin-based method [i.e. Transactional Net Margin Method (TNMM), Cost Plus method (CPM) and Resale Price Method (RPM)] to determine ALP.

The other proposed rules are as follows:
  1. Range
  • The range concept would apply only where a minimum of nine companies are selected as comparable, and where inadequate comparable companies exist, the arithmetic mean concept would continue to apply.
  • Weighted average of three years' data of the comparables would be considered wherein all the numerators and denominators would be aggregated entity-wise for all the years and margins would be computed thereafter.
  • Data points lying within the 40th and 60th percentile of the dataset would constitute the range.
  • In case the transfer price of the tested party falls outside the range arrived at, the median of the range would be considered as the ALP.
  • There would not be a separate tolerance band once the range is allowed.
  • In cases where the range concept does not apply, arithmetic mean as applied before the amendment of section 92C(2) of ITA would apply along with the benefit of the tolerance band (+/-3%).
  1. Multiple year data
  • Multiple year data should comprise of three years' data including the year in which the transaction was undertaken.
  • Multiple year data is to be used only where TNMM, CPM or RPM method are used for determining ALP in all three years for which data has been considered.
  • Use of two years' data out of three years for a comparable company is permitted if the data is not available on account of the following:
    • data is not available on the database at the time of filing the return of income;
    • a comparable fails to clear a quantitative filter in any of the years; and
    • a comparable commenced operations only in the last two years or may have closed down operations during the current year. 
  • If data of the year in which the transaction is undertaken is available at the time of the transfer pricing audit by the department, it can be used by both the taxpayer and the department.
  • The benefit of using multiple year data is now extended to cases where arithmetic mean is used to determine ALP. 
SKP's comments
  • While the regulations have come after quite a while since the announcement was made last year, the intention to reduce litigation is affirmed.
  • The regulations are at a draft stage; the proposed range is lower than international best practices, which advocate the 25th to 75th percentile.
  • Also, other conditions laid down for availing the range benefit (minimum number of comparables, etc.) suggest that there is still a long way to go before things are aligned with international standards. We hope the rules are finalised soon.

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