The Income Tax Department has notified the ‘tolerance’ range for the difference between ‘arm’s length’ value and transfer pricing during international and specified domestic transactions for the assessment year 2024-25.
The Central Board of Direct Taxes (CBDT), which regulates the Income Tax Department, said in a statement that the tolerance range has been kept at one per cent for ‘wholesale turnover’ and three per cent for all other taxpayers, as last year.
‘Wholesale trade’ will be defined as an international transaction of trade in goods or a specified domestic transaction, subject to certain conditions. The CBDT said, “Notification of tolerance band will provide certainty to taxpayers and reduce the perception of risk associated with the pricing of transactions in transfer pricing.”
The ‘tolerance band’ means that if the arm’s length price differs from the transaction value by up to one per cent for wholesalers and up to three per cent for other taxpayers, then the arm’s length price will be the transaction value. Under tax laws, transfer pricing refers to the pricing of goods and services exchanged between related companies. Arm’s length pricing refers to the price that is equally applicable in transactions between entities other than related parties.
Nitin Narang, partner (transfer pricing), Nangia & Co LLP, said the recently notified tolerance band for transfer pricing is applicable for cases where arithmetic mean is taken into account for calculation of arm’s length price/margin. “This notification will provide certainty to taxpayers and reduce the risk associated with transaction pricing in transfer pricing,” Narang said.
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