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India retains transfer pricing tolerance range for 2019 20
November, 06th 2020

India’s Central Board of Direct Taxes, in notification 83/2020, has retained the prevailing transfer pricing tolerance range of 1% for wholesale trading and 3% for other international and domestic intercompany transactions.

These transfer pricing ranges, announced on 19 October, will apply to all transactions undertaken during the financial year ending 31 March 2020.

According to the announcement, to qualify as “wholesale trading,” the purchase cost of finished goods must be 80 percent or more of the total cost of trading activities. In addition, the average monthly closing inventory of such goods must be 10 percent or less of sales pertaining to such trading activities.

The current notification, similar to earlier years, doesn’t provide a specific explanation or clarification regarding why wholesale traders have a different tolerance range.

Further, it appears that the global pandemic had only a marginal effect in FY 2019–20, so the narrow range of 1% was maintained. However, it is expected that the government may take cognizance of the effects and business realities of the global pandemic and may alter the tolerance range of the next accounting year.

The government has provided many relief measures, extending the corporate tax compliance timelines and offering tax relief measures to ease out the strain of the current global pandemic on the taxpayers and their businesses.

However, similar relief measures to enhance the coverage of tolerance range and other transfer pricing safe harbours would have been helpful for MNEs that are required to undertake Indian transfer pricing compliance.

Having said that, the tax community optimistically maintains an expectation that the government will provide broader and better defined transfer pricing safe harbour rules and an arm’s length tolerance range that takes into consideration the effects of the current times.

Tax practitioners also seek detailed guidance on the computation of profits and on what accounts will be considered in establishing the transfer price under each classification of services covered under the tolerance range and safe harbour rules. Such clarifications would be a saving grace for the taxpayer and may help reduce litigation.

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