In line with the Hon’ble Finance Minister’s announcement to align the Indian Transfer Pricing regulations with international best practices (by way of introduction of ‘Range concept’ and allowing the use of ‘Multiple Year data’ for determining the Arm’s Length Price [“ALP”]), the Central Board of Direct Taxes (“CBDT”) had on May 21, 2015 issued a draft scheme of the proposed Rules (“Draft rules”)1 prescribing the mechanism and conditions for using the ‘Range concept’ and ‘Multiple year data concept’ in computing the ALP.
Based on public comments and representations from various industry bodies, the final Rules2 (hereinafter referred as “Rules”) on applicability of range and multiple year data have been notified by the CBDT on October 19, 2015.
The Rules are applicable with effect from April 1, 2014 and would apply for both international transactions and specified domestic transactions from financial year (“FY”) 2014-15 prospectively.
The key changes brought in by the rules are summarized below:
I. Use of multiple year data (vide amendment to Rule 10B of Income-tax Rules, 1962)
· Current year data - The Rules prescribe use of data for the Current year i.e. the year in which taxpayer has undertaken the international transactions or specified domestic transactions (“SDT”) as the case may be, for the purpose of comparability analysis.
· Use of Prior year data - Alternatively, comparables’ data of a preceding financial year will need to be used only where the transfer pricing method applied are Resale Price Method (“RPM”), Cost Plus Method (“CPLM”) or Transactional Net Margin Method (“TNMM”).
· Condition for use of prior year data - As a threshold condition, data for preceding financial year will need to be used only if Current Year data is not available to the taxpayer as on the date of filing of return of income.
· Burden of proof - Historically, past years’ data could be used only if it was demonstrated by the taxpayer that they would have an impact on the transfer price – this requirement on burden of proof has been done away with by the Rules with effect from April 1, 2014
· Availability of Current year data at the time of audit - If at the time of audit proceedings, the data for the Current Year of the comparable transactions / enterprises becomes available, then such data for the Current Year shall be used for determining the comparability of an uncontrolled transaction(s) with the international transaction(s) or the SDT(s), even if the Current Year data was not available at the time of filing of the return of income by the taxpayer.