CBDT Sets 3% transaction tolerance limit & 1% for wholesale

CBDT notifies transfer pricing tolerance limit for AY 2021-22

• The 35th to 65th percentile of the dataset is construed as the arm’s length range under the transfer pricing regulations.
• For cases where there are six or more comparable uncontrolled entries in the dataset and the Transactional Net Margin Method, Comparable Uncontrolled Price Method, Resale Price Method, or Cost Plus Method is selected as the most appropriate method,
• CBDT has notified that the tolerance limit of 1% for wholesale trading and 3 % in all other cases for ALP determination during the AY 2021-22.
• In other situations, such as when there are less than 6 data points or when the method is Another Method or Profit Split Method, the arithmetic mean of the dataset is utilized instead of the 35th to 65th percentile range.

New TP Tolerance range for ALP for AY 2021-22 3% of the transaction price (1% for wholesale trading)

• Wholesale trading” means an international transaction or specified domestic transaction of trading in goods, which fulfills certain conditions.

Wholesale trading tolerance range for AY 2021-22

• Central Board of Direct Taxes has declarer that: According to a notification published by the Finance Ministry, where the difference between the arm’s length pricing stipulated under section 92C of the aforementioned Act is greater than 10%,  A tolerance range of 3% (1 percent for wholesale dealing) is allowed in such instances.
• The transaction price is permitted to be at arm’s length if the arm’s length price (calculated based on the arithmetic mean of the dataset) is within the tolerance range of +/-3 percent (1 percent for wholesale trade) of the transaction price.

The objective of CBDT Notification

• The definition of wholesale trading stays the same: which is defined as trading in goods where
  • The average monthly closing inventory of such goods is 10% or less of sales and
  • The purchase cost of finished goods is 80% or more of the total cost
• This is certified that no one will be adversely affected by the notification’s retrospective effect.

But No specific clarification or Explanation has been given in relation to why wholesale traders have a different limit range.

The tolerance range can be considered as one of the government’s most successful instruments for rationalizing multinationals’ perception of transfer pricing risk in India. However, given the outbreak, it was expected that the CBDT would consider economic and business realities when determining the transfer pricing tolerance range.

While the govt had given many tax and regulatory reliefs to help businesses deal with the issues posed by COVID-19, it was unexpected to learn that the transfer pricing tolerance range remained unaltered.

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