The Central Board of Direct Taxes (CBDT) has notified the tolerance limits for price variation in Arm’s Length Price (ALP) determination for transfer pricing under Section 92C of the Income Tax Act, 1961. The notification is for Assessment Year (AY) 2022-23 and applies to both international and specified domestic transactions. The CBDT has stated that if the variation does not exceed 1% of the wholesale price and 3% in all other cases, then the actual transaction price shall be taken as the ALP. These limits are similar to those notified for AY 2021-22.
Wholesale trading transactions that meet certain criteria are eligible for the one percent tolerance limit. The wholesale trading must meet two conditions, i.e., purchase cost of finished goods must be 80% or more of the total cost related to such trading activities, and the average monthly closing inventory of such goods is ten percent or less of sales related to such trading activities.
The CBDT has clarified that where the variation between the arm’s length price determined under section 92C and the actual transaction price does not exceed one percent for wholesale trading and three percent in all other cases, the actual transaction price shall be deemed to be the arm’s length price.
In summary, the CBDT has notified the tolerance limits for price variation in Arm’s Length Price determination for transfer pricing under Section 92C of the Income Tax Act, 1961, for Assessment Year 2022-23. The notification applies to both international and specified domestic transactions, and if the variation does not exceed 1% of the wholesale price and 3% in all other cases, then the actual transaction price shall be taken as the ALP.
CBDT Income Tax Notification 70/2022 dated 28/06/20222: Transfer Pricing (ALP) Variation Tolerance Limits AY 2022-23
In the past also, the CBDT has notified such price variation tolerance limits for ALP determination under transfer pricing, e.g. Notifications 124/2021 for AY 2021-22, 83/2020 for AY 2020-21, 64/2019 for AY 2019-20, 50/2017 for AY 2017-18 and 2018-19, 57/2016 for AY 2016-17, and 86/2015 for AY 2015-16.
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Whether this variation is permissible only in case when we use Rule 10CA (i.e. when we have less than 6 values of ALP) or in every case variation is to be seen??
Yes, it has been applied only when less than 6 values of ALP, It is not applicable on range concept i.e. rule 10CA