Income Tax - Arm's Length Price - Five Percent Variation Notified

By Vijay Kumar

AS per Section 90C of the Income Tax Act,

Computation of arm's length price.

92C. (1) The arm's length price in relation to an international transaction or specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :-

(a) comparable uncontrolled price method;

(b) resale price method;

(c) cost plus method;

(d) profit split method;

(e) transactional net margin method;

(f) such other method as may be prescribed by the Board.

(2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed:

Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices:

Provided further that if the variation between the arm's length price so determined and price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed such percentage of the latter, as may be notified by the Central Government in the Official Gazette in this behalf, the price at which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm's length price.

The portion marked in red was substituted by the Finance Act 2011, for the words, “five per cent of the latter”

Now, the Government has notified the percentage as per the amended proviso. The Trade and Industry should be happy that confusion as to what percentage the Government is going to notify is ended and more so because the limit is retained at five percent.

The notification stipulates that where the variation between the arm's length price determined under section 92C and the price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price for assessment year 2012-13.

CBDT Notification No. 31/2012 [F.No. 500/185/2011-FTD I], Dated: August 17, 2012