The government has notified amendments for transfer pricing calculations to incorporate range concept and use of multi-year data to reduce litigation and bring Indian laws in line with international practices. The new rules are applicable for calculating the arm's length pricing of international transactions and specified domestic transactions from April 1, 2014. Transfer pricing is one of the main reasons for tax disputes in India. The tax department has made these changes to provide more clarity.
Finance ministry has said that the amended rules would therefore provide clarity in determination of price in transfer pricing cases and reduce disputes on transfer pricing issues. It is a part of the government’s continuing initiative of providing a stable and certain direct tax regime. The new rules also provide for use of multi-year data, which will take care of annual fluctuations.
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. This will help reduce adjustments to only cases where transfer prices are outside the range. The use of multiple year data allows for yearly variations to be averaged out and would therefore add value to transfer pricing analysis.
Transfer pricing refers to fixing the price of goods or services transferred between two related entities, which could be cross-border or domestic. It refers to the practice of computing arms length price for transactions between group companies in different countries for determining profit and levying of taxes.