The government has issued the final rules to incorporate range concept and use of multi-year data in transfer pricing calculations to reduce litigation and bring Indian laws in line with international practices. The Income Tax Department had issued the draft of the rules in May inviting stakeholder comments. The new regime will be applicable for calculating the arm's length pricing of international transactions and specified domestic transactions from April 1, 2014, the finance ministry said on Tuesday.

Transfer pricing refers to fixing the price of goods or services transferred between two related entities, which could be cross-border or domestic. Tax officials have elaborated rules to fix these prices to ensure companies pay appropriate tax.

Most rules are based on how these goods or services would be priced if the transaction was at

an 'arm's length' or between unrelated entities. Transfer pricing is one of the main reasons for tax disputes in India. The tax department has made these changes to provide more clarity. "The use of range concept, being astatistical tool, enhances the reliability of analysis undertaken for

computation of ALP (arm's length price)," the finance ministry said in apress release. Essentially, after comparing prices with that of comparable companies, if transfer prices shown by the assessee company are within a range, the tax authorities will accept the pricing.

This will help reduce adjustments to only cases where transfer prices are outside the range.

The new rules also provide for use of multi-year data, which will take care of annual fluctuations.

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