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) 2023-24 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 and 2022-23.
CBDT Income Tax Notification 46/2023 dated 26/06/2023: Transfer Pricing (ALP) Variation Tolerance Limits AY 2023-24
Price Variation Tolerance Limits for ALP
A. for Wholesale Trading Transactions
Wholesale trading transactions meeting specific criteria are eligible for a tolerance limit of one percent in respect of AY 2023-24. To qualify, the following conditions must be met:
i) Purchase Cost of Finished Goods: The purchase cost of finished goods must account for 80% or more of the total cost associated with such trading activities.
ii) Average Monthly Closing Inventory: The average monthly closing inventory of these goods should be ten percent or less of the sales related to the wholesale trading activities.
In cases 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, the actual transaction price is considered the arm’s length price.
B. for Other Transations (General Limit)
For all other cases, not falling under the category of wholesale trading transactions, the tolerance limit for price variation is set at three percent in respect of Ay 2023-24. If the variation between the arm’s length price and the actual transaction price does not exceed this threshold, the actual transaction price is considered the arm’s length price.
Past Notifications of CBDT ALP Variation Tolerance Limits
The CBDT has previously issued similar notifications regarding price variation tolerance limits for Arm’s Length Price determination under transfer pricing. Some examples of these notifications include:
i) Notification 70/2022 for AY 2022-23,
ii) Notification 124/2021 for AY 2021-22,
iii) Notification 83/2020 for AY 2020-21,
iv) Notification 64/2019 for AY 2019-20,
v) Notification 50/2017 for AY 2017-18 and 2018-19,
vi) Notification 57/2016 for AY 2016-17, and
vii) Notification 86/2015 for AY 2015-16.
Conlusion
To summarize, the CBDT has issued recently issued a notification specifying 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 the Assessment Year 2023-24. These limits are applicable to both international and specified domestic transactions. If the variation between the arm’s length price and the actual transaction price does not exceed 1% for wholesale trading or 3% for other cases, the actual transaction price will be considered the arm’s length price.
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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