Interpretation of Notification-83, 2015 in respect of Arm's Length Range Concept

Notification 83/2015 in respect of Income Tax Rules, 1962 dated 19^th October, 2015

Applicable for determination of arm’s length price of transactions from AY 2015-16 onwards;

Applicable for International Transactions as defined u/s 92B & Specified Domestic Transactions as defined u/s 92BA of Income Tax Act.

Overview along with steps to incorporate amended Rule 10B and newly notified Rule 10CA:

Step 1:

When “MAM” is

(i) CPM (ii) RPM (iii) TNMM, Use only current year data, if not available then use preceding year data. (However, TPO reserves right to use current year data if it is subsequently available at the time of assessment).

(iv) CUP or (v) PSM or (vi) AOM, Use Current year data only.

More than one arm’s length price under any MAM?

Say Hi to Rule 10CA:

Step 2:

For CUP, PSM, AOM, go directly to Step -2

For CPM, RPM, TNMM, Refer below Steps.

Current Year Data Available?

“Yes”– Use also data of immediately preceding two years subject to:

1. Comparable enterprise has carried same or similar transactions in either of two years
2. Also put check for same filters that are used in current year. It must be fulfilled in these two years also. (For e.g. Current year AY 2015-16 and If you have filtered out small companies having less than 1 crores turnover in Data Set, Then same must be applied in Preceding two years data sets.)

“No”– Use Preceding year data, if available. If not available, then leave that comparable. If preceding year data available, also use data of immediately pre-preceding year data subject to:

1. Comparable enterprise has carried same or similar transactions in pre-preceding year.
2. Also put check for same filters that are used in current year. It must be fulfilled in this pre-preceding year also

Note: Preceding years data can never be used even if uncontrolled transactions are same or similar or comparable to Tested Party’s Transactions, when current year transactions are not same or similar or comparable to Tested Party’s Transactions.

Step-3 Arranging Data

For PSM, AOM, and CUP:

Arrange data ascending Order

For CPM, RPM, and TNMM:

• When more than one financial year, For each Comparable, Total of all year’s results together will be calculated in percentage.

For eg.

TNMM= Total of Operating Profit / Operating Cost “for all years” for such comparable

Total of Sales / Costs of “all years” for such comparable

• Arrange data in ascending order.

Step-4 Determination of arm’s length price (Case of Mean):

For PSM, AOM:

Arithmetic mean of such data is arm’s length Price, which is also further subject to 3% or 1% tolerance limit.

For CUP, CPM, RPM, and TNMM:

No of Comparables 5 or Less: Arithmetic mean of such is arm’s length Price, which is also further subject to 3% or 1% tolerance limit. Otherwise go to Step-4

Step-5 Determination of arm’s length price (Case of Range):

For CUP, CPM, RPM, and TNMM:

(a) Determine 35^th Percentile

= No of Comparable in data sets * 35%, if result is not whole number, Convert such result in whole number, Price at such number in data set in ascending order is 35^th Percentile. However, if result is whole number, then 35^th Percentile = Average of “Price at such whole number” and “Price at number succeeding such whole number”)

(E.g No of comparable in data set = 8 * 35% = 2.8, Converting into whole number ≈ 3, Price at 3^rd Rank in ascending order in data set is 35^th Percentile. However, if No of Comparable in data set = 20 * 35% = 7, Then 35^th Percentile = Average of Price at 7^th Rank and Price at 8^th Rank)

(b) Determine 65^th Percentile as above

(c) Determine 50^th Percentile as above

(d) If price of “International Transaction” or “Specified Domestic Transactions” is between 35^th Percentile and 65^th Percentile, Then it is said to be benchmarked.

(e) If not between such range, then arm’s length price shall be 50^th No Tolerance limit of 3% or 1% is applicable in this case. Further adjustment to be made in return of income shall be difference of price at which international transactions taken place and Price at 50^th Percentile only and not 35^th Percentile.

Notes: It is to be noted that Method adopted for calculation Percentile by CBDT is different from Percentile which is calculated by MS-Excel using its Percentile Formula. So it is advisable to Calculate Percentile as per above method and not to use MS-Excel.

Abbreviation Meaning: “MAM”= Most Appropriate method, “CUP”= Comparable Uncontrolled Price Method, “CPM” = Cost Plus Method, “RPM”=Retail Price Method, “PSM”=Profit Split Method, “TNMM”=Transactional Net Margin Method, “AOM”= Any Other Method.

Disclaimer: Above Interpretation of Rules Notified under Income Tax Rules, 1962 is solely personal interpretation by author and Author is not responsible for any litigation under any court of law that may arise due to above interpretation if followed by any person.

(Prepared By: CA Pratik Hasmukhlal Shah. Please feel free to Contact at gotopratikmail@gmail.com or +91-9824388573)