Money & Banking

Transfer pricing: CBDT notifies tolerance range for AY 2020-21

Our Bureau New Delhi | Updated on October 19, 2020

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Government leaves tolerance range unchanged in pandemic times

The Central Board of Direct Taxes (CBDT) has notified the “tolerance range” of transfer price for the assessment year 2020-21.

It has re-notified the prevailing 1 per cent tolerance range for wholesale trading and the 3 per cent range for all other transactions undertaken during the financial year ending March 31, 2020.

The notified tolerance range has been consistently at 1 per cent and 3 per cent in the recent years. If the CBDT had been bit magnanimous, it could have expanded it and provided more comfort to MNCs, claimed tax experts.

“This is an opportunity lost as the CBDT could have used this to give more comfort to the multinational companies in the current Covid-19 times,” said Amit Agarwal, Partner, Nangia & Co.

India’s transfer pricing rules set an acceptable tolerance range for the variation between the arm’s length price and the transaction price. The tolerance range can be seen as one of the effective tools available to the government to rationalise the transfer pricing risk perception of multinationals doing business in India. Put simply, if the variation between the taxpayers transaction price and the arm’s length price is within the “tolerance range”, then no transfer pricing adjustment can be made by the taxman and no additional income will be brought to tax.

A higher tolerance range would mean that transfer pricing adjustments should not be made where the difference between the transaction price and the arm’s length price falls within the tolerance range.

‘Wholesale trading’

“Similar to previous years, no specific explanation or clarification has been provided regarding why wholesale traders have a different tolerance range,” Agarwal said.

According to the notification, to qualify as “wholesale trading,” the purchase cost of finished goods must be 80 per cent or more of the total cost pertaining to such trading activities. Further, the average monthly closing inventory of such goods must be 10 per cent or less of sales pertaining to such.

“Given the pandemic, it was expected that the CBDT would take into account economic and business realities while notifying the tolerance range for transfer pricing cases”, Agarwal added.

“The tolerance range as laid down appears to be a mechanical follow-through of the last year notification, without appreciating the business and commercial realities in Covid-19 times,” he said.

Aseem Chawla, Managing Partner, ASC Legal, a law firm, said the notification provides a safe harbour of variation of 1 per cent in respect of wholesale trading and 3 per cent for all other cases. This is applicable for both specified domestic transactions and for international transactions.

“This additional respite would equally assist the trading entities in mitigation of transfer pricing disputes; where benchmarking of arm’s length pricing itself is a challenging task,” he said.

Published on October 19, 2020

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