Income Tax

## Report on Notification Regarding Arms Length Price Determination **1. Executive Summary:** This report analyzes a notification issued by the Ministry of Finance, Department of Revenue, concerning the determination of arms length price for international and specified domestic transactions under Section 92C of the Income-tax Act, 1961. The notification introduces a tolerance range of 1% for wholesale trading and 3% for all other cases, meaning that if the difference between the determined arms length price and the transaction price falls within this range, the transaction price will be deemed the arms length price for assessment year 2022-2023. This report details the specific provisions of this notification and its potential impact. **2. Introduction:** The purpose of this report is to provide an overview and analysis of Notification No. 70/2022, issued by the Ministry of Finance, Department of Revenue, on June 28, 2022, concerning the determination of arms length price for assessment year 2022-2023. This analysis is based solely on the text of the notification provided. **3. Policy Overview:** This notification amends the existing framework for determining arms length price under Section 92C of the Income-tax Act, 1961, by introducing a tolerance range. * **Core Objective(s):** Based on the text, the core objective is to provide a threshold for acceptable variation between the arms length price and the transaction price in international and specified domestic transactions, thereby simplifying compliance and reducing potential disputes. This focuses on practical application of the pre-existing "arms length price" concept within the Income Tax Act of 1961. **4. Background and Rationale:** This notification likely aims to streamline the process of determining arms length price and reduce the administrative burden on both taxpayers and the tax authorities. By establishing a tolerance range, the amendment addresses potential discrepancies that may arise due to varying valuation methodologies or market fluctuations, providing more certainty and predictability. **5. Key Provisions / Changes:** This notification specifically introduces a "tolerance range" to the arm's length price calculation. * **What specific part of the original policy is being changed:** It provides an exception to the strict application of section 92C of the Income-tax Act, 1961 and rule 10CA of the Income-tax Rules, 1962 by establishing a permissible variance. * **What the *new* rule/provision *is*, based *only* on the amendment text:** The new rule stipulates that if the variation between the arms length price and the transaction price does not exceed 1% for wholesale trading or 3% for all other cases, then the transaction price *shall be deemed* to be the arms length price for the assessment year 2022-2023. A definition of "wholesale trading" is also included, specifying that it means an international transaction or specified domestic transaction of trading in goods, which fulfils the following conditions: (i) purchase cost of finished goods is eighty per cent. or more of the total cost pertaining to such trading activities; and (ii) average monthly closing inventory of such goods is ten per cent. or less of sales pertaining to such trading activities. * **Explain the *difference* or the *effect* of this specific change:** Previously, any deviation from the determined arm's length price could potentially lead to scrutiny and adjustments. This change introduces a buffer zone, allowing for minor discrepancies without triggering automatic reassessment, provided the transaction falls within the defined tolerance limits. This provides a degree of certainty and reduces potential disputes related to minor price differences. It also introduces a specific definition of "wholesale trading" that must be met to qualify for the 1% tolerance range. **6. Target Audience and Stakeholders:** The primary target audience includes businesses engaged in international transactions and specified domestic transactions, particularly those involved in wholesale trading. Stakeholders also include tax authorities, tax consultants, and auditors involved in assessing and verifying transfer pricing compliance. **7. Implementation Aspects (Inferred):** * **Responsible agency/bodies mentioned:** Ministry of Finance, Department of Revenue. * **Any timelines or procedures specified *in the text*?:** The notification applies to the assessment year 2022-2023. Beyond this, no explicit timelines or procedures are outlined in the text. * **Implementation aspects related *specifically to the changes*:** Taxpayers must ensure their transfer pricing documentation adequately supports the determination of the arms length price and demonstrates that any variation between the arms length price and the transaction price falls within the prescribed tolerance range. For wholesale trading, taxpayers must also maintain records to prove that they meet the definition's criteria. **8. Expected Outcomes / Impact of Changes:** The introduction of the tolerance range is likely intended to: * Reduce transfer pricing disputes and litigation. * Provide greater certainty and predictability for businesses. * Streamline the compliance process. * Focus tax authority resources on more significant transfer pricing issues. The specific impact depends on whether businesses fall under "wholesale trading" or "all other cases" due to the different tolerance percentages. **9. Conclusion:** Notification No. 70/2022 introduces a significant change to the determination of arms length price by establishing a tolerance range for international and specified domestic transactions. This change, applicable for the assessment year 2022-2023, aims to reduce disputes, streamline compliance, and provide greater certainty for businesses, particularly those engaged in wholesale trading. Understanding the specific provisions of this notification is crucial for businesses to ensure compliance and optimize their transfer pricing strategies.

Key Entities Referenced