Amendment To Indian TP Rules Allowing Use Of Multiple Year Data And Range Rules

Amendment to Indian TP Rules allowing use of Multiple Year data and Range Rules: (Vide Notification no: 83/2015 dated 19 October 2015 w.e.f 01.04.2014):

The amended rules allow the use of “multiple year data” and “range concept” for determination of ALP for undertaking a transfer pricing comparability analysis.

Multiple Year Data

As a general principle the amended rules require use of current year data while undertaking transfer pricing analysis. Data relating to the current year which may be available subsequently at the time of a transfer pricing audit can be used in the audit proceedings. Use of a multiple year data is permitted in certain Circumstances.

Earlier provision:

Rule 10B (4) of the Rules provides that the data to be used in analysing the comparability of an uncontrolled transaction with an International Transaction shall be the data relating to the financial year in which the International Transaction has been entered into. However, data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared.

Amendment:

As per amended Rule 10B(4) the earlier provision shall not apply while analysing the comparability of an uncontrolled transaction with an international transaction or a specified domestic transaction, entered into on or after the 1st day of April, 2014 (“Current Year” being replaced by Financial year in the above said provision).

Rule 10B (5) provides that, where the RPM, CPM and TNMM has been used for determination of the arm’s length price of an international transaction/ SDT, entered into on or after the 1st day of April, 2014, then, notwithstanding anything contained in sub-rule (4), the data to be used for analysing the comparability of an uncontrolled transaction with an international transaction or a specified domestic transaction shall be:

The data relating to the current year; or
The data relating to the financial year immediately preceding the current, if the data relating to the current year is not available at the time of furnishing the return of income by the assessee, for the assessment year relevant to the current year.

Further, if current year data is available at the time of transfer pricing assessment, then such data must be used.

Range Concept: Ø Earlier provision:

Section 92C(2) provides that in a case where more than one price is determined by the most appropriate method, the ALP shall be taken to be the arithmetical mean of such prices.

Further, if the variation between the ALP and the price at which International Transaction/SDT is undertaken, does not exceed such percentage as notified by the Central Government (not exceeding 3%), of the price of International Transaction/SDT, then the transfer price shall be deemed to be the ALP. The

Central Government has notified one percent for wholesale traders and three percent in all other cases as the tolerable range.

Ø Amendment:

Rule 10 CA – Computation of ALP in certain cases:

Where in respect of an international transaction or a specified domestic transaction, the application of the most appropriate method referred to in Sec 92C(1) results in determination of more than one price, then the arm’s length price in respect of such international transaction or specified domestic transaction shall be computed in accordance with the provisions of this rule.
A dataset shall be constructed by placing the prices as mentioned above in an ascending order and the arm’s length price shall be determined on the basis of the dataset so constructed:

Particulars

MAM used to determine the

ALP

Weighted average of

prices of

Provided, where CUT of current year

and either or both of the two financial

years immediately preceding current

year is being used

CUT of current year shall be

applied for the preceding

years of current year.

CUT in the current year and

aforesaid preceding periods

Provided, where CUT is not available for

current year and data pertaining to two

financial years immediately preceding

current year is being used

CUT of financial years

immediately preceding the

current year.

CUT in the aforesaid two

preceding years

Provided further, if the data for current year is available at the time of transfer pricing assessment proceedings and fails qualitative or quantitative filters, then such comparable cannot used for benchmarking purpose irrespective of the fact that data of previous year remains to be comparable.

(3) Where an enterprise has undertaken comparable uncontrolled transactions in more than one financial year, then for the purposes of sub-rule (2) the weighted average of the prices of such transactions shall be computed in the following manner, namely:—

Method	Weighted average of the prices shall be
In cases where RPM is being used	Weights being assigned to the quantum of sales
In cases where CPM is being used	Weights being assigned to the quantum of costs
In cases where the TNMM is being used,	Weights being assigned to the quantum of costs incurred or sales effected or assets employed or to be employed, or as the case may be, any other base

Range:

Rule 10CA(4) provides that in a case where more than one price is determined by the most appropriate method and where the ALP has been determined as per TNMM, RPM, TNMM and CUP method and has minimum of 6 comparables, the arm’s length range will start from 35th percentile and end at 65th percentile of the weighted average margins of comparables.
Rule 10CA(5) provides that If the transfer price is within the arm’s length range, then the Transfer shall be deemed to be the arm’s length price.
Rule 10CA(6) provides that if the transfer price is outside the arm’s length range referred, the arm’s length price shall be taken to be the median of the dataset.
Rule 10CA(7) provides that If the method used for determining the ALP is other than the methods specified above or the number of comparable companies is less than 6, the arm’s length price shall be the arithmetical mean of all the values included in the dataset.

Further, if the variation between the ALP and the Transfer price, does not exceed such percentage as notified by the Central Government (not exceeding 3%), of the price of International Transaction/SDT, then the transfer price shall be deemed to be the ALP.

In a case where the provisions of sub-rule (4) are not applicable,

Further, if the variation between the ALP and the Transfer Price does not exceed such percentage as notified by the Central Government (not exceeding 3%), of the Transfer Price, then the transfer price shall be deemed to be the ALP.

¹CBDT Notification No. 45/2014 dated 23 September 2014 on the applicable range for AY 2014-15 28 | P a g e

For the purpose of this rule, computation of range Rule 10CA (8), shall be as under:

Ø Thirty-fifth percentile and Sixty-fifth percentile of a dataset is defined as having values arranged in an ascending order, shall be the lowest value in the dataset such that at least thirty five percent and sixth-fifth percent of the values included in the dataset are equal to or less than such value respectively.

Ø Median of the dataset is defined as having values arranged in an ascending order, shall be the lowest value in the dataset such that at least fifty percent. of the values included in the dataset are equal to or less than such value.

Particulars

Computation

If the 35 or 65 percentile, Median is a whole

number

Arithmetic mean of such value and value

immediately succeeding it in dataset shall be

considered

If the 35 or 65 percentile, Median is a not a whole

number

Value immediately succeeding, the said value in

dataset shall be considered

Illustration 1 Provided in Rule 10CA(4)—The data for the current year of the comparable uncontrolled transactions or the entities undertaking such transactions is available at the time of furnishing return of income by the assessee and based on the same, seven enterprises have been identified to have undertaken the comparable uncontrolled transaction in the current year. All the identified comparable enterprises have also undertaken comparable uncontrolled transactions in a period of two years preceding the current year. The Profit level Indicator (PLI) used in applying the most appropriate method is operating profit as compared to operating cost (OP/OC). The weighted average shall be based upon the weight of OC as computed below :

Sl.No.	Name	Year 1	Year 2	Year 3 [Current Year]	Aggregation of OC and OP	Weighted Average
1	2	3	4	5	6	7
1	A	OC = 100 OP = 12	OC = 150 OP = 10	OC = 225 OP = 35	Total OC = 475 Total OP = 57	OP/OC = 12%
2	B	OC = 80 OP = 10	OC = 125 OP = 5	OC = 100 OP = 10	Total OC = 305 Total OP = 25	OP/OC = 8.2%
3	C	OC = 250 OP = 22	OC = 230 OP = 26	OC = 250 OP = 18	Total OC = 730 Total OP = 66	OP/OC = 9%
4	D	OC = 180 OP = (-)9	OC = 220 OP = 22	OC = 150 OP = 20	Total OC = 550 Total OP = 33	OP/OC = 6%
5	E	OC = 140 OP = 21	OC = 100 OP = (-)8	OC = 125 OP = (-)5	Total OC = 365 Total OP = 8	OP/OC = 2.2%
6	F	OC = 160 OP = 21	OC = 120 OP = 14	OC = 140 OP = 15	Total OC = 420 Total OP = 50	OP/OC = 11.9%
7	G	OC = 150 OP = 21	OC = 130 OP = 12	OC = 155 OP = 13	Total OC = 435 Total OP = 46	OP/OC = 10.57%

From the above, the dataset will be constructed as follows :

SI. No.

Values

2.2%

8.2%

10.57%

11.9%

12%

For construction of the arm’s length range the data place of thirty-fifth and sixty-fifth percentile shall be computed in the following manner, namely:

Total no. of data points in dataset *(35/100) Total no. of data points in dataset *(65/100)

Thus, the data place of the thirty-fifth percentile = 7*0.35=2.45.

Since this is not a whole number, the next higher data place, i.e. the value at the third place would have at least thirty five per cent of the values below it. The thirty-fifth percentile is therefore value at the third place, i.e. 8.2%.

The data place of the sixty-fifth percentile is = 7*0.65=4.55.

Since this is not a whole number, the next higher data place, i.e. the value at the fifth place would have at least sixty five per cent of the values below it. The sixty-fifth percentile is therefore value at fifth place, i.e. 10.57%.

The arm’s length range will be beginning at 8.2% and ending at 10.57%.

Therefore, if the transaction price of the international transaction or the specified domestic transaction has OP/OC percentage which is equal to or more than 8.2% and less than or equal to 10.57%, it is within the range. The transaction price in such cases will be deemed to be the arm’s length price and no adjustment shall be required. However, if the transaction price is outside the arm’s length range, say 6.2%, then for the purpose of determining the arm’s length price the median of the dataset shall be first determined in the following manner:

The data place of median is calculated by first computing the total number of data point in the dataset * (50/100). In this case it is 7*0.5=3.5.

Since this is not a whole number, the next higher data place, i.e. the value at the fourth place would have at least fifty per cent of the values below it (median).

The median is the value at fourth place, i.e., 9%. Therefore, the arm’s length price shall be considered as 9% and adjustment shall accordingly be made.

This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at info@sbsandco.com