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Indian Government Notifies 5% Tolerance Band


The Indian Government has recently decided that for the assessment year (AY) 2012-13, if the variation between the arm's length price (ALP) and the price at which the international transaction was undertaken does not exceed 5%, the price at which the international transaction was undertaken shall be deemed to be the ALP. Taxand India offers an insight into the background surrounding the notification.

This notification was long awaited since the second proviso to section 92C(2) was amended by the Finance Act 2011. This enabled the Central Government to notify the percentage of tolerance band.

When the amendment was made, it was seen as an indication of the Government's intent to lower the tolerance band and to prescribe varying percentages for different sectors.The long delay in issuing the notification after the amendment in 2011 created continued uncertainty for the taxpayers as to the tolerance band that would be prescribed.

The Finance Act 2012 has introduced an explanation with retrospective effect clarifying that the 2009 amendment would apply to all assessment proceedings pending as at 1 October 2009. While the validity of the retrospective amendment could be challenged before the Courts, the amendment makes it clear that the tolerance cannot be claimed as a standard deduction in respect of any assessment year, if the proceedings were pending as at 1 October 2009.

Taxand India provide an in depth view on proceedings

Taxand's Take

The notification of the tolerance band for AY 2012-13 has come after a long period of more than 16 months after the Central Government was empowered to prescribe the percentage by the 2011 amendment.The issuance of the notification could reduce the uncertainty for the taxpayers, as the time for maintenance of the Transfer Pricing documentation and filing of the mandatory accountant's report is available up to 30 November 2012.

Your Taxand contact for further queries is:
Mukesh Butani
T. +91 124 339 5010

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