The Central Board for Direct Taxes (“CBDT”) have issued vide notification dated 19th October 2015, the rules to compute the arm’s length price (“ALP”) where more than one comparable data is obtained by selecting the most appropriate method (“MAM”).
New rule 10CA has been introduced in order to determine the ALP of an international transaction or specified domestic transaction, where the selected of MAM results in more than one comparable data.
According to the rule 10CA, if the assessee has entered into similar comparable uncontrolled transaction in either of the two financial years immediately preceding the current year, then the MAM used to determine the ALP shall be similar to that adopted in such years by adopting the weighted average price[1] for the results of the years in consideration.
Further, according to the notification if the MAM adopted by the assessee is any method other than the profit split method (“PSM”) or other method as provided in rule 10AB and the resulting set consists of six or more comparables, then the ALP shall be deemed to fall within the range of the thirty-fifth percentile and sixty-fifth percentile[2] of the comparables results. However, if the result of the assessee falls outside the range, then the ALP shall be determined as the median[3] of the range of results.
However, if the resulting set of comparables consists of less than six comparable then the ALP shall be determined by using the arithmetic mean of the results with a tolerance limit of +3%.
Further, As per the notification, for any international transaction or specified domestic transaction entered on or after 1st April 2014, where the MAM selected is either resale price method (“RPM”), cost plus method (“CPM”) or the transactional net margin method (“TNMM”), then the data to be used for comparability shall be the data for current year or data for the financial year immediately preceding the current year if the data for the current year is not available. The CBDT in its attempt to validate the authenticity of the data has substituted the use of such financial year in proviso to sub-rule (4) with current year. The notification further provides that if the data for current year is not available at the time of filing the return but the same is available at the time of assessment, then such data shall be used to compute the arm’s length return irrespective of the fact that the data was not available at the time of filing of the return[4].
Key takeaways
1. By preferring the use of current year data, the CBDT has rendered the preparation if the transfer pricing reports, based on previous year data, a redundant exercise. The assessee and transfer pricing practitioners shall now prepare the data at the time when the current year data of comparables are available.
2. The use of range concept by substituting the arithmetic mean was amongst the long standing demands of the transfer pricing practitioners. By allowing the use of range, the CBDT has incorporated the practice similar to that of its overseas counterparts where the ALP is determined using the interquartile range. However, the CBDT has allowed the benefit of only the middle thirty percentile instead of the middle fifty percentile used internationally.
[1][1] Weighted average price shall be computed based on the weights determined on the quantum of sales
[2] The percentile shall be calculated after sorting the results of the comparables in ascending order
[3] Median shall be determined by taking the middle value of the odd number comparable data sorted in ascending order. If the set consists of even number of comparables, then the median shall be determined by computing the arithmetic mean of the two middle values of the comparable set sorted in ascending order.
[4] New sub rule (5) to rule 10B