![Notified Tolerance Range – Notification No. SO
3272 (E) [NO.64/2019 (F.NO.500/1/2014-APA-II]
Tolerance Range Applicable for AY 2019-20
Nature of Assessee’s Business Tolerable Range for Variation
Wholesale trade 1% of actual transaction price
In any other case 3% of actual transaction price
Wholesale Trading
in goods
International
transaction or
Specified Domestic
Transaction (SDT)
Average monthly closing
inventory of such goods is
<=10% of sales pertaining to
such trading activities
Purchase cost of finished
goods (FG) is >=80% of the
total cost pertaining to such
trading activities
And](https://image.slidesharecdn.com/tolerancerangeintransferpricing-190923104825/85/Tolerance-range-in-transfer-pricing-13-320.jpg)
![Illustration – Wholesale Trading
Average monthly closing
inventory of Product G
Rs. 20 Lakhs
[10% of less of 21 Crores] Cost of purchase of Product G
Rs. 18 Crores
[more than 80% of Total cost]
Would be considered
as ‘Wholesale Trading’
B Ltd
USA
A Traders Ltd
India
Associated enterprises
International transaction
Value : Rs 21 Crores
Total Cost : Rs 20 Crores
Only Trading Activity, Sells Product G](https://image.slidesharecdn.com/tolerancerangeintransferpricing-190923104825/85/Tolerance-range-in-transfer-pricing-19-320.jpg)
Tolerance range in transfer pricing
- 1. Tolerance Range in Transfer Pricing CA. Divakar Vijayasarathy
- 2. Credits and Acknowledgments Bharathi Priya R D Jugal Gala
- 3. Legends Used in the Presentation ALP Arm’s Length Price CG Central Government CUP Comparable Uncontrolled Price RPM Resale Price Method CPM Cost Plus Method PSM Profit Split Method TNMM Transaction Net Margin Method PLI Profit Level Indicator
- 4. Presentation Schema Transfer Pricing Arm’s Length Price Tolerance Range Applicability of Tolerance Range Range Concept and Multi Year Data Rationale and Applicability - Range Concept Multi Year Data Notified Tolerance Range History of Tolerance Range Notified Illustration Global Perspective Recent Announcements (20.09.2019)
- 5. Transfer Pricing Pricing between Associated Enterprise (AEs) or related parties Special relationship between the parties influencing the price Controlled transaction and price differs from market rate
- 6. Arm’s Length Price – Sec 92C Methods in determining ALP Comparable Uncontrolled Price Method (CUP) Resale Price Method (RPM) Cost Price Method (CPM) Profit Split Method (PSM) Transactional Net Margin Method (TNMM) Any Other Method It is the Fair price that would be charged in a transaction without the influence of a related party
- 7. Tolerance Range Variation (both positive and negative) between the ALP and the price at which the transaction has actually been undertaken does not exceed such percentage as may be notified, then actual transaction price shall be deemed to be the arm's length price The CG has the power to notify the tolerance limit applicable for every AY in determining ALP – Sec 92C(2) In exercise of the powers given, CG has notified the tolerance range applicable for AY 2019-20 on 13th September, 2019
- 8. Applicability of Tolerance Range • Tolerance Range is allowed only if range concept could not be used (number of comparables being less than 6) and arithmetic mean has been used to justify the transaction Applicability There has to be minimum of 6 comparables for the purpose of applying range concept Range concept cannot be applied to sectors like shipping, oil and gas, etc. where the comparables accepted are generally below 6 in number and will have to resort to the same old arithmetic mean and use of tolerance band, if required, for determination of ALP
- 9. Range Concept and Multi Year Data The Government has notified “Range Concept” and “Use of Multi Year Data” on 20th October, 2015 Objective To reduce litigation on Transfer Pricing issues Applicability For International transactions and specified domestic transactions undertaken on or after 1st April, 2014 Range Concept - for determining ALP in transfer pricing Use of Multi Year Data - for undertaking comparability analysis by using weighted average in transfer pricing Purpose
- 10. Rationale – Range Concept • Where more than one price is determined by the most appropriate method, the ALP shall be taken to be arithmetical mean of such price • The use of arithmetical mean for determination of ALP is a unique feature of Indian transfer pricing regime introduced in 2002 • This was necessitated on account of lack of publicly available data in respect of comparables Concept of Arithmetic Mean • Internationally, most countries employ a “range” concept for determination of ALP where more than one price is determined • To align Indian transfer pricing rules with Internationally accepted principles, “Range Concept” was introduced Rationale for introducing Range Concept Concept of arithmetic mean shall also continue to apply in case where the number of comparables is inadequate and range concept cannot be used
- 11. Range Concept - Applicability Transaction price shown by the taxpayers falling within the range will be accepted and no transfer pricing adjustments shall be made An arm’s length range (arranged in ascending order) beginning from the thirty-fifth percentile of the dataset and ending on the sixty-fifth percentile shall be considered A minimum of 6 comparables would be required in the dataset for applying the concept of range The use of range concept, being a statistical tool, enhances the reliability of analysis undertaken for computation of ALP
- 12. Multi Year Data Thus, Indian regulations were amended to allow the use of multiple-year data, which is in line with international guidance and best practices across the globe Current year data may not be available at the time when documentation is prepared Further, prices are generally set based on the past year’s data This created significant issues for taxpayer, because some industries may be cyclical Provided multi year data can be used if the taxpayer can provide evidence that the data for the prior years has a bearing on the transfer price Earlier, Income Tax Rules required that the data to be used for determining an ALP compulsorily must pertain to the year in which the international transaction is entered into
- 13. Notified Tolerance Range – Notification No. SO 3272 (E) [NO.64/2019 (F.NO.500/1/2014-APA-II] Tolerance Range Applicable for AY 2019-20 Nature of Assessee’s Business Tolerable Range for Variation Wholesale trade 1% of actual transaction price In any other case 3% of actual transaction price Wholesale Trading in goods International transaction or Specified Domestic Transaction (SDT) Average monthly closing inventory of such goods is <=10% of sales pertaining to such trading activities Purchase cost of finished goods (FG) is >=80% of the total cost pertaining to such trading activities And
- 14. History of Tolerance Range Notified 0% 1% 2% 3% 4% 5% 6% AY 2012-13 AY 2013-14 AY 2014-15 AY 2015-16 AY 2016-17 AY 2017-18 AY 2018-19 AY 2019-20 Wholesale Retail Tolerance Range has not been changed from AY 2013-14 and it applies for both International Transaction and Specified Domestic Transaction Tolerance Range for AY 2012-13 applies only for International Transaction
- 15. Cases where Arithmetic Mean can be Used The dataset consists of < 6 comparables The Most Appropriate Method considered for determination of the ALP is ‘Profit Split Method or ‘Any Other Method’ Most Appropriate Method Situation(s) CUP No. of comparables less than 6 CPM RPM TNMM PSM Any number of comparables Any Other Method
- 16. Illustration – Tolerance Range A Ltd. Indian Company Software development business B Inc. UK Company (AE) Subsidiary Software Development Services While using TNMM, 4 comparable companies have been identified to have undertaken the comparable uncontrolled transaction in the current year, similar to A Ltd. The Profit level Indicator (PLI) to be used is the operating profit (OP) to operating revenue (OR) The data of operating profit and operating revenue for 4 comparable companies for current year as well as 2 preceding years is available Provides
- 17. Contd. Sl. No. Name of the Comp-any Current year Year 1 (immediately preceding year) Year 2 (year before immediately preceding year) Aggregation of OR and OP Weighted Average (OP/ OR) 1 B Ltd OP= 75 OR=600 OP= 35 OR=300 OP= 58 OR=450 OP= 168 OR=1350 12.44% 2 C Ltd OP= 25 OR= 400 OP=15 OR=267 OP= 21 OR=350 OP= 61 OR= 1017 6.00% 3 D Ltd OP= 127 OR= 1200 OP=45 OR=576 OP= 82 OR=800 OP= 254 OR=2576 9.86% 4 E Ltd OP= 79 OR= 800 OP=34 OR=209 OP= 51 OR=500 OP= 164 OR=1509 10.87% Rs. in crores ALP using Arithmetic mean = (12.44%+6.00%+9.86%+10.87%)/4 =9.79% Range Concept cannot be applied as the method for determining ALP is TNMM and number of comparables are less than 6, hence, arithmetic mean has been used Let us confirm whether the transaction falls within the tolerance range as specified
- 18. Contd. Case 1 Case 2 Actual PLI for A Ltd = 9.51% Actual PLI for A Ltd = 6.32% 3% tolerance range is applicable 3% tolerance range is applicable Within the tolerance range Outside the tolerance range No adjustments Adjustment of 2.47% (9.79%-6.32%) shall be made to the transaction price As the transaction does not pertains to wholesale trade, tolerance range of 3% shall be applicable It shall be noted that here the comparison was of two percentages and hence the actual PLI was compared within the tolerance range percentage In cases where ALP and actual transaction is determined in absolute terms, the tolerance range percentage needs to be applied on transaction value and then confirm whether it falls within the range
- 19. Illustration – Wholesale Trading Average monthly closing inventory of Product G Rs. 20 Lakhs [10% of less of 21 Crores] Cost of purchase of Product G Rs. 18 Crores [more than 80% of Total cost] Would be considered as ‘Wholesale Trading’ B Ltd USA A Traders Ltd India Associated enterprises International transaction Value : Rs 21 Crores Total Cost : Rs 20 Crores Only Trading Activity, Sells Product G
- 20. Global Perspective Country Tolerance Band Prescribed Sri Lanka 3% Czech Republic 3% to 7% to low value intra-group services Ecuador The tax incurred is > 3% of total taxable income Australia No tolerance range Canada No tolerance range
- 21. Recent Announcements by Honourable Finance Minister (20.09.2019) Corporate tax reduction - proposal to reduce tax rate for domestic company from existing 30% to 22% subject to condition that such company is not availing of any exemption or incentive Special rate for manufacturing companies – • proposal to slash the corporate tax rate for new companies engaged in manufacturing from existing 25% to 15% • benefit of reduced tax rate shall be available to companies incorporated on or after October 1, 2019 which don't avail of any exemption/incentive and would commence their production on or before March 31, 2023 Companies can opt for concessional tax regime after expiry of tax holiday • Companies which do not opt for the concessional tax regime and avail the tax exemption/incentive shall continue to pay tax at the pre-amended rate • However, those companies can opt for the concessional tax regime after expiry of their tax holiday/exemption period • After the exercise of the option they shall be liable to pay tax at the rate of 22% and option once exercised cannot be subsequently withdrawn
- 22. Contd. MAT isn't leviable on companies availing concessional tax rate (22% rate) MAT rate reduced • Rate of Minimum Alternate Tax (MAT) has been reduced from existing 18.5% to 15% Withdrawal of enhanced surcharge • It has been proposed that enhanced surcharge introduced by the Finance (No.2) Act, 2019 shall not apply to capital gains arising on sale of equity shares in a company or a unit of an equity oriented fund or a unit of a business trust liable for securities transaction tax, in the hands of an individuals, HUF, AOP, BOI and AJP. • Further, the enhanced surcharge shall also not apply to capital gains arising on sale of any security including derivatives, in the hands of Foreign Portfolio Investors (FPIs) No buy-back tax on listed Cos that have made a public announcement of buy-back of shares before July 5, 2019 Expansion of scope of spending of CSR funding; now CSR can be spent on Government aided research institutes, IITs, etc.
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