I-T department keeps tolerance range for transfer pricing unchanged

In a disappointment to businesses reeling from the Covid impact, the income tax department has kept the tolerance range for transfer pricing unchanged for 2019-20. 

This implies that there will be no taxation relief for businesses dealing in related-party transactions.

The CBDT on Monday re-notified the prevailing 1 per cent tolerance range for wholesale trading and 3 per cent range for all other transactions undertaken during the financial year ending March 31, 2020. 

Amit Agarwal, Partner Nangia & Co, said given the pandemic, it was expected the CBDT would take into account economic and business realities while notifying the tolerance range for transfer pricing cases. 

“The tolerance range, as laid down, appears to be a mechanical follow-through of last year’s notification, without appreciating the business and commercial realities in Covid-19 times,” said Agarwal.

 Indian transfer pricing rules prescribe a range of 35th to 65th percentile. However, in certain cases, arithmetic mean is used to measure the arm’s length price and tolerance range. 

Similar to previous years, to qualify as “wholesale trading,” the purchase cost of finished goods must be 80 per cent or more of the total cost pertaining to such trading activities, according to the notification. 

Further, the average monthly closing inventory of such goods must be 10 per cent or less of sales pertaining to such trading activities.

Besides, no specific explanation or clarification has been provided regarding why wholesale traders have a different tolerance range.

Experts pointed out that while the government has provided a slew of tax and regulatory relaxations in order to enable businesses to meet challenges erupting out of Covid-19, it’s surprising to see that the tolerance range for transfer pricing has been left unchanged.

According to experts, the tolerance range can be seen as one of the effective tools available to the government to rationalise transfer pricing risk perception of multinationals doing business in India.