India: CBDT prescribes final rules ‘multiple year data’

Tax Insights
from Transfer Pricing
India: CBDT prescribes final rules
for use of ‘arm’s length range’ and
‘multiple year data’
October 28, 2015
In brief
The Central Board of Direct Taxes (CBDT) has now issued the final rules to give effect to the use of
‘multiple year data’ and ‘range concept’ which were introduced by Finance Act, 2014. These rules would
be applicable to international transactions and specified domestic transactions that are entered into by
taxpayers on or after 1 April 2014.
In detail
Use of multiple year data
 Would be applicable only in
cases where Resale Price
Method (RPM), Cost Plus
Method (CPM) or
Transactional Net Margin
Method (TNMM) has been
selected as the Most
Appropriate Method (MAM).
 For each comparable, the
data shall relate to the
current year. In case such
data are not available at the
time of furnishing the return
of income, data pertaining to
up to two preceding financial
years may be used.
Observation: If current year is
Year zero and the financial
year preceding that is Year 1
and the year prior to such year
is Year 2, then it is worth noting
that the rules do not envisage a
situation wherein a comparable
is selected only if it has data
relating to Year 2.
Owing to this uncertainty over
which the taxpayer has no
control, penalty provisions, as
they currently exist, may need
modification.
 Current year data, if
available during assessment,
shall be used.
 If a comparable is selected on
the basis of preceding year
data, but is not found to be
comparable for the current
year for qualitative or
quantitative reasons, then
such comparable would need
to be rejected from the data
set.
Observation: This is not in line
with contemporaneous
documentation requirements
and the requirement that
documentation should exist
latest by the due date of filing
the return of income [Rule
10D(4)], especially if additional
comparable(s) are added
during assessment. This would
lead to uncertainty as to the
basis of arm’s length price
(ALP) determination, and may
even result in penal
consequences for taxpayers.
 When using multiple year
data, data for each
comparable shall be the
weighted average of the
selected years. An illustration
explaining the computation
is provided below:
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Tax Insights
Year 0
Year 1
Year 2
Total
Operating profit
250
300
350
900
Total cost
1700
1800
1900
5400
Application of range
 The ‘range concept’ shall be
applicable when: (a) the MAM is
either Comparable Uncontrolled
Price (CUP) Method, RPM, CPM,
or TNMM; and (b) there are at
least 6 comparables. Where these
conditions are not fulfilled,
‘arithmetic mean’ shall continue to
apply, as before, along with the
tolerance range benefit.
Observation: Specifying the number
of comparables may lead to a
OP/TC for the comparable would
be 900/5400 = 16.7%
situation where the taxpayer uses
range for setting a transfer price but
may have to apply the arithmetic
mean at the time of the assessment.
Such situations could lead to a fair
amount of ambiguity, uncertainty
and reconciliation difficulties for
taxpayers and jeopardize their TP
documentation and price setting.
points lying between the 35th and
65th percentile of the data set.
 If the transaction price falls within
the range, then the same shall be
deemed to be the ALP. If the
transaction price falls outside the
range, the ALP shall be taken to be
the Median of the data set.
 Once the values in a data set are
arranged in ascending order, the
arm’s length range would be data
 The computation mechanism of
range, is explained by way of
illustrations below (as reproduced
from the final rules):
Illustration 1: Where the data set comprises 7 data points (arranged in ascending order), and the percentiles computed are
not whole numbers.
Percentile
Formula
Result
Value to be selected
35th
Total no. of data points in dataset*35% = [7 * 35%]
2.45
3rd value*
65th
Total no. of data points in dataset*65% = [7 * 65%]
4.55
5th value*
Median
Total no. of data points in datasets*50% = [7 * 50%]
3.50
4th value*
* Value referred to here is the place value in the data set as arranged in ascending order.
Illustration 2: Where the data set comprises 20 data points (arranged in ascending order), and the percentiles computed
are whole numbers.
Percentile
Formula
Value to be selected
35th
Total no. of data points in dataset * 35% = [20 * 35%]
7.00
Mean of 7th & 8th value
65th
Total no. of data points in dataset * 65% = [20 * 65%]
13.00
Mean of 13th & 14th value
Median
Total no. of data points in dataset * 50% = [20 * 50%]
10.00
Mean of 10th & 11th value
The takeaway
Largely, the provisions seem to have
given clarity in relation to use of
multiple year data and application of
range concept. The intent of the
2
Result
CBDT to reduce TP litigation is clearly
visible. The reduction of minimum
number of comparables required for
availing the range from 9 to 6; a
relative broadening/widening of the
range from 40th - 60th percentile to
35th – 65th; and allowing the use of
range in case of CUP Method are
undoubtedly positives emerging from
the final rules.
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Tax Insights
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact:
Transfer Pricing
Sanjay Tolia, Mumbai
+91 22 6689 1322
[email protected]
Bipin Pawar, Delhi
+91 124 330 6501
[email protected]
Indraneel R Chaudhury, Bangalore
+91 80 4079 6064
[email protected]
Transfer Pricing Global and US Leaders
Isabel Verlinden, Brussels
Global Transfer Pricing Leader
+32 2 710 44 22
[email protected]
Horacio Peña, New York
US Transfer Pricing Leader
+1 646 471 1957
[email protected]
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