CBDT proposes changes in norms for computation of transfer pricing

The Central Board of Direct Taxes (CBDT) proposes to review norms for computation of arm's length price (ALP) for international and domestic transactions, introducing a range concept.

The finance minister, in his budget speech, had proposed the use of a range concept and use of multiple year data compared with the prevalent practice of using arithmetic mean and one year's data for comparable analysis.

The new methodology proposed by the CBDT stipulates that for computation of range, a minimum of nine entities would be used as comparable entities with selected party and that the weighted average of three year data will be used for construction of data set. The data points between the 40th and 60th percentile should be considered for the range. If the points fall outside the range then the median of the range would be taken as ALP and adjustment to transfer price shall be made.

"The range concept shall be used only in case the method used for determination of ALP is Transactional Net Margin Method (TNMM), Resale Price Method (RPM) or Cost Plus Method (CPM)", the CBDT said.

For entities for which comparable data are not available, arithmetic mean method will still be in effect.

The CBDT has invited suggestion for the norms till 31 May.

The reworked transfer pricing norms come at a time when the government has been aggressively working towards streamlining tax issues which have been a source of contention between the MNCs and the tax department in the past. The efforts by the government to reduce corporate taxes and to implement Goods and Services Tax (GST) have met serious opposition in Parliament. The government has also been embroiled with MNCs over the issue of retrospective taxation.

The amendment of the Income tax Act was aimed at facilitating introduction of ''range'' concept for determination of arm's length price of an international transaction or a specified domestic transaction. Further, use of multiple year data for comparability analysis for the purpose of transfer pricing was also to be incorporated.

The use of multiple year data and ''range'' concept in transfer pricing regime is proposed to be incorporated through amendments to be made to Income-tax Rules, 1962.