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CBDT Announces New Transfer Pricing Method
The Central Board of Direct Taxes ('CDBT') has recently issued a notification prescribing a new transfer pricing method for benchmarking the international transactions falling within the ambit of Indian Transfer Pricing Regulations ('TPR'). Taxand India discusses how this is likely to affect tax payers based in India.
The TPR in India were inserted in the tax statue with effect from Financial Year ('FY') 2001-02 whereby six methods have been prescribed ie i) Comparable Uncontrolled Price Method; ii) Resale Price Method; iii) Cost Plus Method; iv) Profit Split Method; v) Transactional Net Margin Method; and vi) such other method as may be prescribed by the Board.
For the first time since the introduction of TPR in the India, the CBDT has introduced the sixth method by way of Notification No 18/2012, dated 23 May 2012 thereby inserting Rule 10AB ('Rule') to the Income-tax Rules, 1962.
The new method inserted by way of Rule 10AB states that "any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all relevant facts", shall be considered as one of the methods for determination of ALP. This Rule is applicable from FY 2011-12 onwards
A further passage has been provided by the OECD guidelines giving freedom to Multinational Enterprises to apply a method other than the prescribed ones. The Rule introduced by the CDBT envisages a similar provision whereby a stringent application of the prescribed five methods seems to have been relaxed.
The new method prescribed by the CBDT is ambiguous unlike the other five methods that have been in existence over the years of transfer pricing regime in India. There is no specific guidance provided by the CBDT for application of this method.
The Rule inter-alia provides for use of a price that would have been charged in a parallel situation in an uncontrolled environment for benchmarking. This indicates that the comparison of a controlled transaction need not necessarily be with an existing transaction entered in a third party scenario, but could be a proposed third party transaction as well. Accordingly, the Rule suggests that the taxpayer could determine the arm's length price of controlled transactions, taking into consideration valuation reports, price quotes, rate cards or other such standard quotes which are not existing transactions.
The sixth method introduced by the CBDT does not provide either clarity or guidance in terms of the manner of benchmarking a transaction under this method. Though it appears that the Rule would provide more flexibility to the taxpayer for determination of the arm's length price, it needs to be noted that this flexibility will also be available to the Revenue authorities, and could be used to undertake aggressive adjustments resulting in further litigation.
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