Notification of tolerance range shall provide certainty to taxpayers and reduce the risk perception associated with pricing of a transaction in transfer pricing

The Central Board of Direct Taxes (CBDT) has issued notification no. 116/2024 dated October 18, 2024 notifying the tolerance range for AY 2024-25. The notification of tolerance range shall provide certainty to taxpayers and reduce the risk perception associated with pricing of a transaction in transfer pricing.

Proviso to sub-rule(7) of rule 10CA sub-rule(7) provides that, “if the variation between the arm’s length price so determined at which the international transaction or specified domestic transaction has actually been undertaken does not exceed such percentage not exceeding three percent of the latter, as may be notified by the Central Government in the Official Gazette in this behalf, the price at which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm’s length price.”

The tolerance range for transfer pricing is as follows:

(a) The tolerance ranges shall be 1% for transactions in the nature of “wholesale trading” and 3% for others, respectively, as notified last year and

(b) The term ‘wholesale trading’, shall be defined as an international transaction or specified domestic transaction of trading in goods which fulfil all the following conditions:

i. Purchase cost of finished goods is 80% or more of the total cost pertaining to such trading activities; and

ii. Average monthly closing inventory of goods is 10% or less of sales pertaining to such trading activities.

Tolerance range for transfer pricing deems actual transaction price as arm's length where variation falls within notified tolerance. Notification establishes a tolerance range under the proviso to sub rule (7) of rule 10CA, Income tax Rules, 1962 for AY 2024 25, prescribing that where the variation between the determined arm's length price and the actual transaction price falls within the notified tolerance range, the actual price shall be deemed the arm's length price. It differentiates tolerance treatment for transactions characterised as wholesale trading and for other transactions, and defines 'wholesale trading' by reference to objective criteria relating to purchase cost composition and the relationship between inventory and sales.