CBDT Draft Rules on "range concept" and "multiple year data" - A boon or bane?

May 25,2015
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Rahul K Mitra (Partner, Tax & Transfer Pricing, KPMG India)

Nishant Saini (Partner, Transfer Pricing, KPMG India)

The Central Board of Direct Taxes (CBDT) has recently issued the much awaited draft rules for the use of multiple year dataand application of the concept of range,for the purposes of computing of arm's length price (ALP), post the announcement made by the Finance Minister, in the budget speech for 2014, for the introduction ofthe said concepts in the Indian transfer pricing regulations (TP), in place of single year data and arithmetic mean, which have been in vogue since the inception of the formal TP regulations in India; and have fuelled the majority of TP adjustments in India, particularly in the context of comparability analyses. The usage of single year data and arithmetic mean significantly deviated from the guidelines of the OECD; and also the best practices followed by large number of countries having TP regulations, falling under the brackets of both developed and developing economies.

The concept of range as introduced in the draft rules is proposed to be applicable only while determining ALP by application of Transactional Net Margin Method (TNMM), Cost Plus Method (CPM) and Resale Price Method (RPM). The CBDT proposes that a minimum of nine comparables would be required in the data set for application of the concept of range. The data points lying between the 40th and 60th percentile of the data set shall constitute the range. If the margin of the tested party falls outside the data range, TP adjustments shall be made with reference to the median of the range. However, in absence of the minimum of nine comparables, the concept of range would not apply; and resort would be had tothe existing provision of arithmetic mean, along with the benefit of the tolerance band of 3% (1% in the case of wholesale trading companies). Incidentally, the OECD and UN TP guidelines; and also tax authorities across the world, namely of both developing and developed countries, adopt the classical inter-quartile range, namely the range between the 25th and 75th percentiles; and the concept of range proposed by the CBDT, as above, is quite unique; and it is not sure as to whether implementing the same would absolve the objective of mitigating TP litigation, as we shall try and explain through empirical data, later on in this article.

For the use of multiple year data in determination of ALP, the rules provide for use of data for three years including the data for the current year in which the transaction was undertaken. However, use of data for two out of three years shall be permitted in cases where- (a) data for current year is not available in the public domain at the time of preparation of transfer pricing documentation; (b) any comparable company has commenced the operation only in the last two years; or (c) any comparable company fails to clear a quantitative filter in any one out of three years. However, if current year data is not available at the time of preparation of TP documentation, but becomes available during the TP audit, it can be used by both the taxpayers and Revenue Authorities.

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