India Narrows “Tolerance Band” for Related-Party Transactions

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May 31 – India’s central government recently issued notification F. No. 500/185/2011 FTD 1 (hereinafter referred to as the ‘Notification’) to narrow the “tolerance band” used in calculating the arm’s length range for related-party transactions. Prior to the Notification, related-party transactions were considered to be at “arm’s length” if they were within a five percent band surrounding the mean of a set of comparable financial results of companies in a related field.

However, this Notification provides that the transaction price will be deemed to be at an arm’s length if the variation between that price of the transaction and the price determined under section 92C are within the tolerance band of:

  • 1.0 percent for transactions involving “wholesale traders”; or
  • 3.0 percent for all other transactions.

If the actual price of the transaction is within the tolerance band, then a transfer pricing adjustment will not be made.

Please note, however, that the terms “wholesale” and “wholesale trader” are both undefined in the Income Tax Act – a point that has drawn controversy with regard to defining and understanding exactly what constitutes a “wholesale trade.”

This change falls in line with India’s recent efforts to implement stricter transfer pricing standards in the country in order to increase domestic tax revenues and to promote compliance with its tax laws.

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