Objectives & Agenda : To know the tolerance range in transfer pricing applicable for Assessment Year 2019-20 notified by CBDT on 13th September, 2019. To understand the conditions for applying tolerance range with relevant illustrations. To analyse the tolerance range notified by CBDT for previous years. Finally, the webinar will also cover the tolerance range in transfer pricing in other Countries.

1. Tolerance Range in Transfer Pricing
CA. Divakar Vijayasarathy

2. Credits and Acknowledgments
Bharathi Priya R D
Jugal Gala

3. Legends Used in the Presentation
ALP Arm’s Length Price
CG Central Government
CUP Comparable Uncontrolled Price
RPM Resale Price Method
CPM Cost Plus Method
PSM Profit Split Method
TNMM Transaction Net Margin Method
PLI Profit Level Indicator

4. Presentation Schema
Transfer Pricing
Arm’s Length
Price
Tolerance Range
Applicability of
Tolerance Range
Range Concept
and Multi Year
Data
Rationale and
Applicability -
Range Concept
Multi Year Data
Notified
Tolerance Range
History of
Tolerance Range
Notified
Illustration
Global
Perspective
Recent
Announcements
(20.09.2019)

5. Transfer Pricing
Pricing between Associated Enterprise (AEs) or related parties
Special relationship between the parties influencing the price
Controlled transaction and price differs from market rate

6. Arm’s Length Price – Sec 92C
Methods in determining ALP
Comparable
Uncontrolled Price
Method (CUP)
Resale Price
Method (RPM)
Cost Price
Method (CPM)
Profit Split
Method (PSM)
Transactional Net
Margin Method
(TNMM)
Any Other
Method
It is the Fair price that would be charged in a transaction without the influence of a related party

7. Tolerance Range
Variation (both positive and negative) between the ALP and the price at which the transaction has actually
been undertaken does not exceed such percentage as may be notified, then actual transaction price shall be
deemed to be the arm's length price
The CG has the power to notify the tolerance limit applicable for every AY in determining ALP – Sec 92C(2)
In exercise of the powers given, CG has notified the tolerance range applicable for AY 2019-20 on 13th
September, 2019

8. Applicability of Tolerance Range
• Tolerance Range is allowed only if range concept could not be used (number of
comparables being less than 6) and arithmetic mean has been used to justify the
transaction
Applicability
There has to be minimum of 6 comparables for the purpose of applying range concept
Range concept cannot be applied to sectors like shipping, oil and gas, etc. where the comparables
accepted are generally below 6 in number and will have to resort to the same old arithmetic mean and
use of tolerance band, if required, for determination of ALP

9. Range Concept and Multi Year Data
The Government has notified “Range Concept” and “Use of Multi Year Data” on 20th October, 2015
Objective To reduce litigation on Transfer Pricing issues
Applicability
For International transactions and specified domestic transactions
undertaken on or after 1st April, 2014
Range Concept - for determining ALP in transfer pricing
Use of Multi Year Data - for undertaking comparability
analysis by using weighted average in transfer pricing
Purpose

10. Rationale – Range Concept
• Where more than one price is determined by the most appropriate method, the
ALP shall be taken to be arithmetical mean of such price
• The use of arithmetical mean for determination of ALP is a unique feature of
Indian transfer pricing regime introduced in 2002
• This was necessitated on account of lack of publicly available data in respect of
comparables
Concept of
Arithmetic
Mean
• Internationally, most countries employ a “range” concept for determination of
ALP where more than one price is determined
• To align Indian transfer pricing rules with Internationally accepted principles,
“Range Concept” was introduced
Rationale for
introducing
Range Concept
Concept of arithmetic mean shall also continue to apply in case where the number
of comparables is inadequate and range concept cannot be used

11. Range Concept - Applicability
Transaction price shown by the taxpayers falling within the range will be accepted and no transfer pricing
adjustments shall be made
An arm’s length range (arranged in ascending order) beginning from the thirty-fifth percentile of the dataset
and ending on the sixty-fifth percentile shall be considered
A minimum of 6 comparables would be required in the dataset for applying the concept of range
The use of range concept, being a statistical tool, enhances the reliability of analysis undertaken for
computation of ALP

12. Multi Year Data
Thus, Indian regulations were amended to allow the use of multiple-year data, which is in line with
international guidance and best practices across the globe
Current year data may not be available at the time when documentation is prepared
Further, prices are generally set based on the past year’s data
This created significant issues for taxpayer, because some industries may be cyclical
Provided multi year data can be used if the taxpayer can provide evidence that the data for the prior years has
a bearing on the transfer price
Earlier, Income Tax Rules required that the data to be used for determining an ALP compulsorily must pertain
to the year in which the international transaction is entered into

13. Notified Tolerance Range – Notification No. SO
3272 (E) [NO.64/2019 (F.NO.500/1/2014-APA-II]
Tolerance Range Applicable for AY 2019-20
Nature of Assessee’s Business Tolerable Range for Variation
Wholesale trade 1% of actual transaction price
In any other case 3% of actual transaction price
Wholesale Trading
in goods
International
transaction or
Specified Domestic
Transaction (SDT)
Average monthly closing
inventory of such goods is
<=10% of sales pertaining to
such trading activities
Purchase cost of finished
goods (FG) is >=80% of the
total cost pertaining to such
trading activities
And

14. History of Tolerance Range Notified
0%
1%
2%
3%
4%
5%
6%
AY 2012-13 AY 2013-14 AY 2014-15 AY 2015-16 AY 2016-17 AY 2017-18 AY 2018-19 AY 2019-20
Wholesale Retail
Tolerance Range has not been changed from AY 2013-14 and it applies for both International Transaction and
Specified Domestic Transaction
Tolerance Range for AY 2012-13 applies only for International Transaction

15. Cases where Arithmetic Mean can be Used
The dataset consists of < 6 comparables
The Most Appropriate Method considered for determination of the ALP is ‘Profit Split Method or ‘Any
Other Method’
Most Appropriate Method Situation(s)
CUP
No. of comparables less than 6
CPM
RPM
TNMM
PSM Any number of comparables
Any Other Method

16. Illustration – Tolerance Range
A Ltd.
Indian Company
Software
development
business
B Inc.
UK Company (AE)
Subsidiary
Software
Development Services
While using TNMM, 4 comparable companies have been identified to have undertaken the
comparable uncontrolled transaction in the current year, similar to A Ltd. The Profit level
Indicator (PLI) to be used is the operating profit (OP) to operating revenue (OR)
The data of operating profit and operating revenue for 4 comparable companies for current
year as well as 2 preceding years is available
Provides

17. Contd.
Sl. No. Name of the
Comp-any
Current year Year 1
(immediately
preceding year)
Year 2
(year before immediately
preceding year)
Aggregation of
OR and OP
Weighted Average
(OP/ OR)
1 B Ltd OP= 75
OR=600
OP= 35
OR=300
OP= 58
OR=450
OP= 168
OR=1350
12.44%
2 C Ltd OP= 25
OR= 400
OP=15
OR=267
OP= 21
OR=350
OP= 61
OR= 1017
6.00%
3 D Ltd OP= 127
OR= 1200
OP=45
OR=576
OP= 82
OR=800
OP= 254
OR=2576
9.86%
4 E Ltd OP= 79
OR= 800
OP=34
OR=209
OP= 51
OR=500
OP= 164
OR=1509
10.87%
Rs. in crores
ALP using Arithmetic mean = (12.44%+6.00%+9.86%+10.87%)/4
=9.79%
Range Concept cannot be applied as the method for determining ALP is TNMM and
number of comparables are less than 6, hence, arithmetic mean has been used
Let us confirm whether the transaction falls within the tolerance range as specified

18. Contd.
Case 1 Case 2
Actual PLI for A Ltd = 9.51% Actual PLI for A Ltd = 6.32%
3% tolerance range is
applicable
3% tolerance range is
applicable
Within the tolerance range Outside the tolerance range
No adjustments Adjustment of 2.47%
(9.79%-6.32%) shall be
made to the transaction
price
As the transaction does not pertains to wholesale trade, tolerance range of 3% shall be applicable
It shall be noted that here the comparison was of two percentages and hence the actual PLI was
compared within the tolerance range percentage
In cases where ALP and actual transaction is determined in absolute terms, the tolerance range
percentage needs to be applied on transaction value and then confirm whether it falls within the range

19. Illustration – Wholesale Trading
Average monthly closing
inventory of Product G
Rs. 20 Lakhs
[10% of less of 21 Crores] Cost of purchase of Product G
Rs. 18 Crores
[more than 80% of Total cost]
Would be considered
as ‘Wholesale Trading’
B Ltd
USA
A Traders Ltd
India
Associated enterprises
International transaction
Value : Rs 21 Crores
Total Cost : Rs 20 Crores
Only Trading Activity, Sells Product G

20. Global Perspective
Country Tolerance Band Prescribed
Sri Lanka 3%
Czech Republic 3% to 7% to low value intra-group
services
Ecuador The tax incurred is > 3% of total taxable
income
Australia No tolerance range
Canada No tolerance range

21. Recent Announcements by Honourable
Finance Minister (20.09.2019)
Corporate tax reduction - proposal to reduce tax rate for domestic company from existing 30% to 22% subject to
condition that such company is not availing of any exemption or incentive
Special rate for manufacturing companies –
• proposal to slash the corporate tax rate for new companies engaged in manufacturing from existing 25% to
15%
• benefit of reduced tax rate shall be available to companies incorporated on or after October 1, 2019 which
don't avail of any exemption/incentive and would commence their production on or before March 31, 2023
Companies can opt for concessional tax regime after expiry of tax holiday
• Companies which do not opt for the concessional tax regime and avail the tax exemption/incentive shall
continue to pay tax at the pre-amended rate
• However, those companies can opt for the concessional tax regime after expiry of their tax holiday/exemption
period
• After the exercise of the option they shall be liable to pay tax at the rate of 22% and option once exercised
cannot be subsequently withdrawn

22. Contd.
MAT isn't leviable on companies availing concessional tax rate (22% rate)
MAT rate reduced
• Rate of Minimum Alternate Tax (MAT) has been reduced from existing 18.5% to 15%
Withdrawal of enhanced surcharge
• It has been proposed that enhanced surcharge introduced by the Finance (No.2) Act, 2019 shall not apply
to capital gains arising on sale of equity shares in a company or a unit of an equity oriented fund or a unit
of a business trust liable for securities transaction tax, in the hands of an individuals, HUF, AOP, BOI and
AJP.
• Further, the enhanced surcharge shall also not apply to capital gains arising on sale of any security
including derivatives, in the hands of Foreign Portfolio Investors (FPIs)
No buy-back tax on listed Cos that have made a public announcement of buy-back of shares before July 5, 2019
Expansion of scope of spending of CSR funding; now CSR can be spent on Government aided research
institutes, IITs, etc.

23. Thank You
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