The Revenue Department has reduced the permissible gap between the value of cross-border wholesale trade transactions and their arms length price computed by tax officials to 1% from the earlier 3%. In case the gap is more than 1%, the wholesale transactions between the Indian unit and the related overseas enterprise will be subject to a rigorous transfer pricing audit.

In the case of all other sectors, the permissible variation between the arms length price decided by the tax officer and the value declared by the company has been retained at 3%. The Department had indicated earlier that in sectors where operating profit margin is less, the gap ought to be narrow. In sectors like software development, where operating profitability is higher, unlike wholesale trading, value of transactions could vary within a range of 3% with respect to the arms length price attributed by the taxman.
Officers compute the arms length price of a cross-border transaction comparing it with similar transactions between unrelated entities that take place in an independent manner.

The Central Board of Direct Taxes has defined wholesale trading as one in which the cost of finished goods account for 80% of the cost of trading activities.