Rule-10E, Income-tax Rules
Report from an accountant to be furnished under section 92E.
10E. The report from an accountant required to be furnished under section 92E by every person who has entered into an international transaction [or a specified domestic transaction] during a previous year shall be in Form No. 3CEB and be verified in the manner indicated therein.]
Rule-10DB, Income-tax Rules
1[Furnishing of Report in respect of an International Group.
10DB. 1a[1b[(1) The income-tax authority for the purposes of section 286 shall be the Joint Director as may be designated by the Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems), as the case may be.]
(2) The notification under sub-section (1) of section 286 shall be made in Form No. 3CEAC two months prior to the due date for furnishing of report as specified under sub-section (2) of said section.]
(3) Every parent entity or the alternate reporting entity, as the case may be, resident in India, shall, for every reporting accounting year, furnish the report referred to in sub-section (2) of section 286 1aa[***] in Form No. 3CEAD.
2[(4) The period for furnishing of the report under sub-section (4) of section 286 by the constituent entity referred to in that sub-section shall be twelve months from the end of the reporting accounting year:
Provided that in case the parent entity of the constituent entity is resident of a country or territory, where, there has been a systemic failure of the country or territory and the said failure has been intimated to such constituent entity, the period for submission of the report shall be six months from the end of the month in which said systemic failure has been intimated.]
2a[(5) The information required to be conveyed under proviso to sub-section (4) of section 286 regarding the designated constituent entity shall be furnished in Form No. 3CEAE.]
(6) For the purposes of sub-section (7) of section 286, the total consolidated group revenue of the international group shall be 2b[six thousand four hundred] crore rupees.
(7) Where the total consolidated group revenue of the international group, as reflected in the consolidated financial statement, is in foreign currency, the rate of exchange for the calculation of the value in rupees of such total consolidated group revenue shall be the telegraphic transfer buying rate of such currency on the last day of the accounting year preceding the accounting year.
(8) The Principal Director General of Income-tax (Systems) or Director General of Income-tax (Systems), as the case may be, shall specify the procedure for electronic filing of Form No. 3CEAC, Form No. 3CEAD and Form No. 3CEAE and shall also be responsible for evolving and implementing appropriate security, archival and retrieval policies in relation to the information furnished under this rule.
Explanation.— For the purposes of this rule,—
(A) "telegraphic transfer buying rate" shall have the same meaning as assigned in the Explanation to rule 26;
(B) the terms 'accounting year', 'alternate reporting entity', 'consolidated financial statement', 'international group' and 'reporting accounting year' shall have the same meaning as assigned in sub-section (9) of section 286.]
Rule-10DA, Income-tax Rules
1[2[Maintenance and furnishing of information and document by certain person under section 92D.]
10DA. (1) Every person, being a constituent entity of an international group shall,—
(i) if the consolidated group revenue of the international group, of which such person is a constituent entity, as reflected in the consolidated financial statement of the international group for the accounting year, exceeds five hundred crore rupees; and
(ii) the aggregate value of international transactions,—
(A) during the accounting year, as per the books of account, exceeds fifty crore rupees, or
(B) in respect of purchase, sale, transfer, lease or use of intangible property during the accounting year, as per the books of accounts, exceeds ten crore rupees,
keep and maintain the following information and documents of the international group, namely:—
(a) a list of all entities of the international group along with their addresses;
(b) a chart depicting the legal status of the constituent entity and ownership structure of the entire international group;
(c) a description of the business of international group during the accounting year including,—
(I) the nature of the business or businesses;
(II) the important drivers of profits of such business or businesses;
(III) a description of the supply chain for the five largest products or services of the international group in terms of revenue and any other products including services amounting to more than five per cent of consolidated group revenue;
(IV) a list and brief description of important service arrangements made among members of the international group, other than those for research and development services;
(V) a description of the capabilities of the main service providers within the international group;
(VI) details about the transfer pricing policies for allocating service costs and determining prices to be paid for intra-group services;
(VII) a list and description of the major geographical markets for the products and services offered by the international group;
(VIII) a description of the functions performed, assets employed and risks assumed by the constituent entities of the international group that contribute at least ten per cent of the revenues or assets or profits of such group; and
(IX) a description of the important business restructuring transactions, acquisitions and divestments;
(d) a description of the overall strategy of the international group for the development, ownership and exploitation of intangible property, in cluding location of principal research and development facilities and their management;
(e) a list of all entities of the international group engaged in development and management of intangible property along with their addresses;
(f) a list of all the important intangible property or groups of intangible property owned by the international group along with the names and addresses of the group entities that legally own such intangible property;
(g) a list and brief description of important agreements among members of the international group related to intangible property, including cost contribution arrangements, principal research service agreements and license agreements;
(h) a detailed description of the transfer pricing policies of the international group related to research and development and intangible property;
(i) a description of important transfers of interest in intangible property, if any, among entities of the international group, including the name and address of the selling and buying entities and the compensation paid for such transfers;
(j) a detailed description of the financing arrangements of the international group, including the names and addresses of the top ten unrelated lenders;
(k) a list of group entities that provide central financing functions, including their place of operation and of effective management;
(l) a detailed description of the transfer pricing policies of the international group related to financing arrangements among group entities;
(m) a copy of the annual consolidated financial statement of the international group; and
(n) a list and brief description of the existing unilateral advance pricing agreements and other tax rulings in respect of the international group for allocation of income among countries.
3[(2) The information and document specified under sub-rule (1) shall be furnished to the Joint 3a[Director] referred to in sub-rule (1) of rule 10DB, in Form No. 3CEAA on or before the due date for furnishing the return of income as specified under sub-section (1) of section 139.
(3) The constituent entity shall furnish Part A of Form No. 3CEAA even if the conditions specified under sub-rule (1) are not satisfied.
(4) Where there are more than one 3b[constituent entities of an international group required to file the information and document under sub-rule (2),] the Form No. 3CEAA may be furnished by any one constituent entity, if, —
(a) the international group has designated such entity for this purpose; and
(b) the information has been conveyed in Form No. 3CEAB to the Joint 3a[Director] referred to in sub-rule (1) of rule 10DB, in this behalf thirty days before the due date of furnishing the Form No. 3CEAA.]
(4[5]) The Principal Director General of Income-tax (Systems) or Director General of Income-tax (Systems), as the case may be, shall specify the procedure for electronic filing of Form No. 3CEAA and Form No. 3CEAB and shall also be responsible for evolving and implementing appropriate security, archival and retrieval policies in relation to the information furnished under this rule.
(4[6]) The information and documents specified in sub-rule (1) shall be kept and maintained for a period of eight years from the end of the relevant assessment year.
(4[7]) The rate of exchange for the calculation of the value in rupees of the consolidated group revenue in foreign currency shall be the telegraphic transfer buying rate of such currency on the last day of the accounting year.
Explanation.— For the purposes of this rule,—
(A) "telegraphic transfer buying rate" shall have the same meaning as assigned in the Explanation to rule 26;
(B) the terms 'accounting year', 'consolidated financial statement' and 'international group' shall have the same meaning as assigned in sub-section (9) of section 286.]
Rule-10D, Income-tax Rules
Information and documents to be kept and maintained under section 92D .
10D . (1) Every person who has entered into an international transaction [or a specified domestic transaction] shall keep and maintain the following information and documents, namely:—
(a) a description of the ownership structure of the assessee enterprise with details of shares or other ownership interest held therein by other enterprises;
(b) a profile of the multinational group of which the assessee enterprise is a part along with the name, address, legal status and country of tax residence of each of the enterprises comprised in the group with whom international transactions [or specified domestic transactions, as the case may be,] have been entered into by the assessee, and ownership linkages among them;
(c) a broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted;
(d) the nature and terms (including prices) of international transactions [or specified domestic transactions] entered into with each associated enterprise, details of property transferred or services provided and the quantum and the value of each such transaction or class of such transaction;
(e) a description of the functions performed, risks assumed and assets employed or to be employed by the assessee and by the associated enterprises involved in the international transaction [or the specified domestic transaction] ;
(f) a record of the economic and market analyses, forecasts, budgets or any other financial estimates prepared by the assessee for the business as a whole and for each division or product separately, which may have a bearing on the international transactions [or the specified domestic transactions] entered into by the assessee;
(g) a record of uncontrolled transactions taken into account for analysing their comparability with the international transactions [or the specified domestic transactions] entered into, including a record of the nature, terms and conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing of the international transactions [or specified domestic transactions, as the case may be] ;
(h) a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction [or specified domestic transaction] ;
(i) a description of the methods considered for determining the arm's length price in relation to each international transaction [or specified domestic transaction] or class of transaction, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case;
(j) a record of the actual working carried out for determining the arm's length price, including details of the comparable data and financial information used in applying the most appropriate method, and adjustments, if any, which were made to account for differences between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions;
(k) the assumptions, policies and price negotiations, if any, which have critically affected the determination of the arm's length price;
(l) details of the adjustments, if any, made to transfer prices to align them with arm's length prices determined under these rules and consequent adjustment made to the total income for tax purposes;
(m) any other information, data or document, including information or data relating to the associated enterprise, which may be relevant for determination of the arm's length price.
(2) [Nothing contained in sub-rule (1), in so far as it relates to an international transaction, shall] apply in a case where the aggregate value, as recorded in the books of account, of international transactions entered into by the assessee does not exceed one crore rupees :
Provided that the assessee shall be required to substantiate, on the basis of material available with him, that income arising from international transactions entered into by him has been computed in accordance with section 92.
[(2A) Nothing contained in sub-rule (1), in so far as it relates to an eligible specified domestic transaction referred to in rule 10THB, shall apply in a case of an eligible assessee mentioned in rule 10THA and—
(a) the eligible assessee, referred to in clause (i) of rule 10THA, shall keep and maintain the following information and documents, namely:—
(i) a desciption of the ownership structure of the assessee enterprise with details of shares or other ownership interest held therein by other enterprises;
(ii) a broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted;
(iii) the nature and terms (including prices) of specified domestic transactions entered into with each associated enterprise and the quantum and value of each such transaction or class of such transaction;
(iv) a record of proceedings, if any, before the regulatory commission and orders of such commission relating to the specified domestic transaction;
(v) a record of the actual working carried out for determining the transfer price of the specified domestic transaction;
(vi) the assumptions, policies and price negotiations, if any, which have critically affected the determination of the transfer price; and
(vii) any other information, data or document, including information or data relating to the associated enterprise, which may be relevant for determination of the transfer price;
(b) the eligible assessee, referred to in clause (ii) of rule 10THA, shall keep and maintain the following information and documents, namely:—
(i) a description of the ownership structure of the assessee co-operative society with details of shares or other ownership interest held therein by the members;
(ii) description of members including their addresses and period of membership;
(iii) the nature and terms (including prices) of specified domestic transactions entered into with each member and the quantum and value of each such transaction or class of such transaction;
(iv) a record of the actual working carried out for determining the transfer price of the specified domestic transaction;
(v) the assumptions, policies and price negotiations, if any, which have critically affected the determination of the transfer price;
(vi) the documentation regarding price being routinely declared in transparent manner and being available in public domain; and
(vii) any other information, data or document which may be relevant for determination of the transfer price.]
(3) The information specified in [sub-rules (1) and (2A)] shall be supported by authentic documents, which may include the following :
(a) official publications, reports, studies and data bases from the Government of the country of residence of the associated enterprise, or of any other country;
(b) reports of market research studies carried out and technical publications brought out by institutions of national or international repute;
(c) price publications including stock exchange and commodity market quotations;
(d) published accounts and financial statements relating to the business affairs of the associated enterprises;
(e) agreements and contracts entered into with associated enterprises or with unrelated enterprises in respect of transactions similar to the international transactions [or the specified domestic transactions, as the case may be];
(f) letters and other correspondence documenting any terms negotiated between the assessee and the associated enterprise;
(g) documents normally issued in connection with various transactions under the accounting practices followed.
(4) The information and documents specified under [sub-rules (1), (2) and (2A)], should, as far as possible, be contemporaneous and should exist latest by the specified date referred to in clause (iv) of section 92F:
Provided that where an international transaction [or a specified domestic transaction] continues to have effect over more than one previous year, fresh documentation need not be maintained separately in respect of each previous year, unless there is any significant change in the nature or terms of the international transaction [or the specified domestic transaction, as the case may be], in the assumptions made, or in any other factor which could influence the transfer price, and in the case of such significant change, fresh documentation as may be necessary under [sub-rules (1), (2) and (2A)] shall be maintained bringing out the impact of the change on the pricing of the international transaction [or the specified domestic transaction].
(5) The information and documents specified in [sub-rules (1), (2) and (2A)] shall be kept and maintained for a period of eight years from the end of the relevant assessment year.
Rule-10CB, Income-tax Rules
1[Computation of interest income pursuant to secondary adjustments.
10CB. (1) For the purposes of sub-section (2) of section 92CE of the Act, the time limit for repatriation of 2[excess money or part thereof] shall be on or before ninety days,—
| (i) | from the due date of filing of return under sub-section (1) of section 139 of the Act where primary adjustments to transfer price has been made suo-moto by the assessee in his return of income; | |
| (ii) | from the date of the order of Assessing Officer or the appellate authority, as the case may be, if the primary adjustments to transfer price as determined in the aforesaid order has been accepted by the assessee; | |
| 3[(iii) | in a case where primary adjustment to transfer price is determined by an advance pricing agreement entered into by the assessee under section 92CC of the Act in respect of a previous year,- |
| (a) | from the date of filing of return under sub-section (1) of section 139 of the Act ifthe advance pricing agreement has been entered into on or before the due date of filing of return for the relevant previous year; | |
| (b) | from the end of the month in which the advance pricing agreement has been entered into if the said agreement has been entered into after the due date of filing of return for the relevant previous year] |
| (iv) | from the due date of filing of return under sub-section (1) section 139 of the Act in the case of option exercised by the assessee as per the safe harbour rules under section 92CB;or | |
| (v) | 4[from the date of giving effect by the Assessing Officer under rule 44H to the resolution arrived at under mutual agreement procedure, where the primary adjustment to transfer price is determined by such resolution under a Double Taxation Avoidance Agreement entered into under section 90 or section 90A of the Act] |
(2) The imputed per annum interest income on 2[excess money or part thereof] which is not repatriated within the time limit as per sub-section (1) of section 92CE of the Act shall be computed,—
| (i) | at the one year marginal cost of fund lending rate of State Bank of India as on 1st of April of the relevant previous year plus three hundred twenty five basis points in the cases where the international transaction is denominated in Indian rupee; or | |
| (ii) | at six month London Interbank Offered Rate as on 30th September of the relevant previous year plus three hundred basis points in the cases where the international transaction is denominated in foreign currency. |
5[(3) The interest referred to in sub-rule (2) shall be chargeable on excess money or part thereof which is not repatriated—
| (a) | in cases referred to in clause (i), in sub-clause(a) of clause (iii) and clause (iv) of sub rule(1), from the due date of filing of return under sub-section (1) of section 139 of the Act; | |
| (b) | in cases referred to in clause(ii) of sub-rule(1), from the date of the order of Assessing Officer or the appellate authority, as the case may be; | |
| (c) | in cases referred to in sub-clause(b) of clause (iii) of sub-rule(1), from the end of the month in which the advance pricing agreement has been entered into by the assessee under section 92CC of the Act; | |
| (d) | in cases referred to in clause (v) of sub-rule (1), from the date of giving effect by the Assessing Officer under rule 44H to the resolution arrived at under mutual agreement procedure.] |
5[Explanation- For the purposes of this rule, —
| (A) | "International transaction" shall have the same meaning as assigned to it in section 92B of the Act; | |
| (B) | The rate of exchange for the calculation of the value in rupees of the international transaction denominated in foreign currency shall be the telegraphic transfer buying rate of such currency on the last day of the previous year in which such international transaction was undertaken and the "telegraphic transfer buying rate" shall have the same meaning as assigned in the Explanation to rule 26.] |
Rule-10CA, Income-tax Rules
[Computation of arm's length price in certain cases.
10CA. (1) Where in respect of an international transaction or a specified domestic transaction, the application of the most appropriate method referred to in sub-section (1) of section 92C results in determination of more than one price, then the arm's length price in respect of such international transaction or specified domestic transaction shall be computed in accordance with the provisions of this rule.
(2) A dataset shall be constructed by placing the prices referred to in sub-rule (1) in an ascending order and the arm's length price shall be determined on the basis of the dataset so constructed:
Provided that in a case referred to in clause (i) of sub-rule (5) of rule 10B, where the comparable uncontrolled transaction has been identified on the basis of data relating to the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)], has in either or both of the two financial years immediately preceding the current year undertaken the same or similar comparable uncontrolled transaction then,—
(i) the most appropriate method used to determine the price of the comparable uncontrolled transaction or transactions undertaken in the aforesaid period and the price in respect of such uncontrolled transactions shall be determined; and
(ii) the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the current year and in the aforesaid period preceding it shall be included in the dataset instead of the price referred to in sub-rule (1):
Provided further that in a case referred to in clause (ii) of sub-rule (5) of rule 10B, where the comparable uncontrolled transaction has been identified on the basis of the data relating to the financial year immediately preceding the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)], has in the financial year immediately preceding the said financial year undertaken the same or similar comparable uncontrolled transaction then,—
(i) the price in respect of such uncontrolled transaction shall be determined by applying the most appropriate method in a similar manner as it was applied to determine the price of the comparable uncontrolled transaction undertaken in the financial year immediately preceding the current year; and
(ii) the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the aforesaid period of two years shall be included in the dataset instead of the price referred to in sub-rule (1) :
Provided also that where the use of data relating to the current year in terms of the proviso to sub-rule (5) of rule 10B establishes that,—
(i) the enterprise has not undertaken same or similar uncontrolled transaction during the current year; or
(ii) the uncontrolled transaction undertaken by an enterprise in the current year is not a comparable uncontrolled transaction,
then, irrespective of the fact that such an enterprise had undertaken comparable uncontrolled transaction in the financial year immediately preceding the current year or the financial year immediately preceding such financial year, the price of comparable uncontrolled transaction or the weighted average of the prices of the uncontrolled transactions, as the case may be, undertaken by such enterprise shall not be included in the dataset.
(3) Where an enterprise has undertaken comparable uncontrolled transactions in more than one financial year, then for the purposes of sub-rule (2) the weighted average of the prices of such transactions shall be computed in the following manner, namely:—
(i) where the prices have been determined using the method referred to in clause (b) of sub-rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of sales which has been considered for arriving at the respective prices;
(ii) where the prices have been determined using the method referred to in clause (c) of sub-rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of costs which has been considered for arriving at the respective prices;
(iii) where the prices have been determined using the method referred to in clause (e) of sub- rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of costs incurred or sales effected or assets employed or to be employed, or as the case may be, any other base which has been considered for arriving at the respective prices.
(4) Where the most appropriate method applied is a method other than the method referred to in clause (d) or clause (f) of sub-section (1) of section 92C and the dataset constructed in accordance with sub-rule (2) consists of six or more entries, an arm's length range beginning from the thirty-fifth percentile of the dataset and ending on the sixty-fifth percentile of the dataset shall be constructed and the arm's length price shall be computed in accordance with sub-rule (5) and sub-rule (6).
(5) If the price at which the international transaction or the specified domestic transaction has actually been undertaken is within the range referred to in sub-rule (4), then, the price at which such international transaction or the specified domestic transaction has actually been undertaken shall be deemed to be the arm's length price.
(6) If the price at which the international transaction or the specified domestic transaction has actually been undertaken is outside the arm's length range referred to in sub-rule (4), the arm's length price shall be taken to be the median of the dataset.
(7) In a case where the provisions of sub-rule (4) are not applicable, the arm's length price shall be the arithmetical mean of all the values included in the dataset:
Provided that, if the variation between the arm's length price so determined and price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed such percentage not exceeding three per cent 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.
(8) For the purposes of this rule,—
(a) "the thirty-fifth percentile" of a dataset, having values arranged in an ascending order, shall be the lowest value in the dataset such that at least thirty five per cent of the values included in the dataset are equal to or less than such value:
Provided that, if the number of values that are equal to or less than the aforesaid value is a whole number, then the thirty-fifth percentile shall be the arithmetic mean of such value and the value immediately succeeding it in the dataset;
(b) "the sixty-fifth percentile" of a dataset, having values arranged in an ascending order, shall be the lowest value in the dataset such that at least sixty five per cent of the values included in the dataset are equal to or less than such value:
Provided that, if the number of values that are equal to or less than the aforesaid value is a whole number, then the sixty-fifth percentile shall be the arithmetic mean of such value and the value immediately succeeding it in the dataset;
(c) "the median" of the dataset, having values arranged in an ascending order, shall be the lowest value in the dataset such that at least fifty per cent of the values included in the dataset are equal to or less than such value:
Provided that, if the number of values that are equal to or less than the aforesaid value is a whole number, then the median shall be the arithmetic mean of such value and the value immediately succeeding it in the dataset.
Illustration 1.—The data for the current year of the comparable uncontrolled transactions or the entities undertaking such transactions is available at the time of furnishing return of income by the assessee and based on the same, seven enterprises have been identified to have undertaken the comparable uncontrolled transaction in the current year. All the identified comparable enterprises have also undertaken comparable uncontrolled transactions in a period of two years preceding the current year. The Profit level Indicator (PLI) used in applying the most appropriate method is operating profit as compared to operating cost (OP/OC). The weighted average shall be based upon the weight of OC as computed below :
Sl. No. Name Year 1 Year 2 Year 3 [Current Year] Aggregation of OC and OP Weighted Average
1 2 3 4 5 6 7
1
A
OC = 100
OP = 12
OC = 150
OP = 10
OC = 225
OP = 35
Total OC = 475
Total OP = 57
OP/OC = 12%
2
B
OC = 80
OP = 10
OC = 125
OP = 5
OC = 100
OP = 10
Total OC = 305
Total OP = 25
OP/OC = 8.2%
3
C
OC = 250
OP = 22
OC = 230
OP = 26
OC = 250
OP = 18
Total OC = 730
Total OP = 66
OP/OC = 9%
4
D
OC = 180
OP = (-)9
OC = 220
OP = 22
OC = 150
OP = 20
Total OC = 550
Total OP = 33
OP/OC = 6%
5
E
OC = 140
OP = 21
OC = 100
OP = (-)8
OC = 125
OP = (-)5
Total OC = 365
Total OP = 8
OP/OC = 2.2%
6
F
OC = 160
OP = 21
OC = 120
OP = 14
OC = 140
OP = 15
Total OC = 420
Total OP = 50
OP/OC = 11.9%
7
G
OC = 150
OP = 21
OC = 130
OP = 12
OC = 155
OP = 13
Total OC = 435
Total OP = 46
OP/OC = 10.57%
From the above, the dataset will be constructed as follows :
SI. No. 1 2 3 4 5 6 7
Values 2.2% 6% 8.2% 9% 10.57% 11.9% 12%
For construction of the arm's length range the data place of thirty-fifth and sixty-fifth percentile shall be computed in the following manner, namely:
Total no. of data points in dataset *(35/100)
Total no. of data points in dataset *(65/100)
Thus, the data place of the thirty-fifth percentile = 7*0.35=2.45.
Since this is not a whole number, the next higher data place, i.e. the value at the third place would have at least thirty five per cent of the values below it. The thirty-fifth percentile is therefore value at the third place, i.e. 8.2%.
The data place of the sixty-fifth percentile is = 7*0.65=4.55.
Since this is not a whole number, the next higher data place, i.e. the value at the fifth place would have at least sixty five per cent of the values below it. The sixty-fifth percentile is therefore value at fifth place, i.e. 10.57%.
The arm's length range will be beginning at 8.2% and ending at 10.57%.
Therefore, if the transaction price of the international transaction or the specified domestic transaction has OP/OC percentage which is equal to or more than 8.2% and less than or equal to 10.57%, it is within the range. The transaction price in such cases will be deemed to be the arm's length price and no adjustment shall be required. However, if the transaction price is outside the arm's length range, say 6.2%, then for the purpose of determining the arm's length price the median of the dataset shall be first determined in the following manner:
The data place of median is calculated by first computing the total number of data point in the dataset * (50/100). In this case it is 7*0.5=3.5.
Since this is not a whole number, the next higher data place, i.e. the value at the fourth place would have at least fifty per cent of the values below it (median).
The median is the value at fourth place, i.e., 9%. Therefore, the arm's length price shall be considered as 9% and adjustment shall accordingly be made.
Illustration 2.—The data of the current year is available in respect of enterprises A, C, E, F and G at the time of furnishing the return of income by the assessee and the data of the financial year preceding the current year has been used to identify comparable uncontrolled transactions undertaken by entrprises B and D. Further, if the enterprises have also undertaken comparable uncontrolled transactions in earlier years as detailed in the table, the weighted average and dataset shall be computed as below:
Sl. No. Name Year 1 Year 2 Year 3 [Current Year] Aggregation of OC and OP Weighted Average
1 2 3 4 5 6 7
1
A
OC = 100
OP = 12
OC = 150
OP = 10
OC = 225
OP = 35
Total OC = 475
Total OP = 57
OP/OC = 12%
2
B
OC = 80
OP = 10
OC = 125
OP = 5
Total OC = 205
Total OP = 15
OP/OC = 7.31%
3
C
OC = 250
OP = 22
OC = 230
OP = 26
OC = 250
OP = 18
Total OC = 730
Total OP = 66
OP/OC = 9%
4
D
OC = 220
OP = 22
Total OC = 220
Total OP = 22
OP/OC = 10%
5
E
OC = 100
OP = (-)5
Total OC = 100
Total OP = (-)5
OP/OC = (-)5%
6
F
OC = 160
OP = 21
OC = 120
OP = 14
OC = 140
OP = 15
Total OC = 420
Total OP = 50
OP/OC = 11.9%
7
G
OC = 150
OP = 21
OC = 130
OP = 12
OC = 155
OP = 13
Total OC = 435
Total OP = 46
OP/OC = 10.57%
From the above, the dataset will be constructed as follows :
SI. No. 1 2 3 4 5 6 7
Values (-)5% 7.31% 9% 10% 10.57% 11.9% 12%
If during the course of assessment proceedings, the data of the current year is available and the use of such data indicates that B has failed to pass any qualitative or quantitative filter or for any other reason the transaction undertaken is not a comparable uncontrolled transaction, then, B shall not be considered for inclusion in the dataset. Further, if the data available at this stage indicates a new comparable uncontrolled transaction undertaken by enterprise H, then, it shall be included. The weighted average and dataset shall be recomputed as under :
Sl. No. Name Year 1 Year 2 Year 3 [Current Year] Aggregation of OC and OP Weighted Average
1 2 3 4 5 6 7
1
A
OC = 100
OP = 12
OC = 150
OP = 10
OC = 225
OP = 35
Total OC = 475
Total OP = 57
OP/OC = 12%
2
C
OC = 250
OP = 22
OC = 230
OP = 26
OC = 250
OP = 18
Total OC = 730
Total OP = 66
OP/OC = 9%
3
D
OC = 220
OP = 22
OC = 150
OP = 20
Total OC = 370
Total OP = 42
OP/OC = 11.35%
4
E
OC = 100
OP = (-)5
Total OC = 100
Total OP = (-)5
OP/OC = (-)5%
5
F
OC = 160
OP = 21
OC = 120
OP = 14
OC = 140
OP = 15
Total OC = 420
Total OP = 50
OP/OC = 11.9%
6
G
OC = 150
OP = 21
OC = 130
OP = 12
OC = 155
OP = 13
Total OC = 435
Total OP = 46
OP/OC = 10.57%
7
H
OC = 150
OP = 12
OC = 80
OP = 10
Total OC = 230
Total OP = 22
OP/OC = 9.56%
From the above, the dataset will be constructed as follows :
SI. No. 1 2 3 4 5 6 7
Values (-)5% 9% 9.56% 10.57% 11.35% 11.9% 12%
Illustration 3.— In a given case the dataset of 20 prices arranged in ascending order is as under :
Sl. No. Profits (in Rs. Thousand)
1 2
1 42.00
2 43.00
3 44.00
4 44.50
5 45.00
6 45.25
7 47.00
8 48.00
9 48.15
10 48.35
11 48.45
12 48.48
13 48.50
14 49.00
15 49.10
16 49.35
17 49.50
18 49.75
19 50.00
20 50.15
Applying the formula given in the Illustration 1, the data place of the thirty-fifth and sixty-fifty percentile is determined as follows:
Thirty-fifth percentile place = 20* (35/100) = 7.
Sixty-fifth percentile place = 20* (65/100) = 13.
Since the thirty-fifth percentile place is a whole number, it shall be the average of the prices at the seventh and next higher, i.e.; eighth place. This is (47+48)/2 = Rs.47,500.
Similarly, the sixty-fifth percentile will be average of thirteenth and fourteenth place prices. This is (48.5+49)/2=Rs.48,750
The median of the range (the fiftieth percentile place) = 20*(50/100)=10
Since the fiftieth percentile place is a whole number, it shall be the average of the prices at the tenth and next higher, i.e.; eleventh place. This is (48.35+48.45)/2= Rs.48,400.
Thus, the arm's length range in this case shall be from Rs.47,500 to Rs.48,750.
Consequently, any transaction price which is equal to or more than Rs.47,500 but less than or equal to Rs.48,750 shall be considered to be within the arm's length range.]
Rule-10C, Income-tax Rules
Most appropriate method.
10C. (1) For the purposes of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction [or specified domestic transaction], and which provides the most reliable measure of an arm's length price in relation to the international transaction [or the specified domestic transaction, as the case may be].
(2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely:—
(a) the nature and class of the international transaction [or the specified domestic transaction];
(b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises;
(c) the availability, coverage and reliability of data necessary for application of the method;
(d) the degree of comparability existing between the international transaction [or the specified domestic transaction] and the uncontrolled transaction and between the enterprises entering into such transactions;
(e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transaction or between the enterprises entering into such transactions;
(f) the nature, extent and reliability of assumptions required to be made in application of a method.
