Range Concept in Transfer Pricing

Range Concept in Transfer Pricing

Determination of arm’s length price using Range Concept

Whether a single price is arrived at?

  • If Yes, the price thus determined is the arm’s length price.
  • If No, as per range concept, if prescribed conditions are satisfied or by applying Arithmetic Mean in any other case.

Rule 10CA(1) provides that where in respect of an international transaction, the application of the most appropriate method referred to in section 92C(1) results in determination of more than one price, then, the arm’s length price in respect of such international transaction has to be computed on the basis of the dataset constructed by placing such prices in an ascending order as provided in Rule 10CA(2).

Application of multiple year data for construction of dataset

1.Relating to transactions undertaken in Current Year

Where the most appropriate method is the resale price method or cost plus method or transactional net margin method and 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 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,-

  1. the most appropriate method used to determine the price of the comparable uncontrolled transaction undertaken in the current year shall be applied in similar manner to the comparable uncontrolled transaction or transactions undertaken in the aforesaid period and the price in respect of such uncontrolled transactions shall be determined; and
  1. 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).

2.Relating to transactions undertaken in Financial Year immediately preceding the Current Year

Further, where the most appropriate method is the resale price method or cost plus method or transactional net margin method 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 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, –

  1. 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
  1. 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).

3.If enterprise has not undertaken Similar Uncontrolled Transaction  

In such cases, where the use of data relating to the current year for determination of ALP subsequently at the time of assessment establishes that,-

  1. the enterprise has not undertaken same or similar uncontrolled transaction during the current year; or
  1. 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.

Note:-

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:-

If method is:-

Resale Price method

  • By assigning weights to the quantum of sales which has been considered for arriving at the respective prices.

Cost Plus method

  • By assigning weights to the quantum of costs which has been considered for arriving at the respective prices.

Transactional Net Margin method

  • By assigning weights 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.
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Range Concept

Where the most appropriate method applied is:-

  • a method other than the profit split method or a method prescribed by the CBDT and
  • the dataset constructed in accordance with sub-rule (2) consists of six or more entries,

an arm’s length range beginning from the 35th percentile of the dataset and ending on the 65th percentile of the dataset shall be constructed.

When to apply range concept?

  • Most appropriate method selected is Comparable uncontrolled price method, resale price method, cost plus method or transactional net margin method and
  • The dataset constructed has six or more entries.

How to apply range concept?

  • Arrange the values in the dataset in the ascending order.
  • Where the actual transaction price falls within 35th and 65th percentile of the dataset, the value of transaction will be accepted to be arm’s length price.
  • Where the transfer price does not fall within the above range, then median of dataset shall be taken as the Arm’s Length price.

Meaning of Terms:

35th Percentile:

The lowest value in the dataset such that at least 35% of the values included in the dataset are equal to or less than such value. However, if the number of values that are equal to or less than the aforesaid value is a whole number, then, the 35th percentile shall be the arithmetic mean of such value and the value immediately succeeding it in the dataset.

65th Percentile:

The lowest value in the dataset such that at least 65% of the values included in the dataset are equal to or less than such value. However, if the number of values that are equal to or less than the aforesaid value is a whole number, then, the 65th percentile shall be the arithmetic mean of such value and the value immediately succeeding it in the dataset.

The Median:

The lowest value in the dataset such that at least 50% of the values included in the dataset are equal to or less than such value. However, 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. Understand range concept with following illustrations:

Examples

Example No.1

Where the data set comprises 7 data points (arranged in ascending order), and the percentiles computed are not whole numbers:

Data Points:12,15,24,45,49,56,71

Percentile Formula Result Value to be selected
35th 7*35% 2.45 24
65th 7*65% 4.55 49
Median 7*50% 3.5 45

So, Range starts from 24 to 49. If actual transaction price is between range, then Arm Length price is actual transaction price. If not, then Arm Length price is the Median i.e.45

Example No.2

Where the data set comprises 20 data points (arranged in ascending order), and the percentiles computed are whole numbers:

Data Points:12,15,18,22,24,27,31,34,35,41,44,51,55,58,61,62,67,71,75,78.

Percentile Formula Result Value to be selected
35th 20*35% 7 32.5
65th 20*65% 13 56.5
Median 20*50% 10 42.5

So, Range starts from 33 to 57. If actual transaction price is between range, then Arm Length price is actual transaction price. If not, then Arm Length price is the Median i.e.42.5

When Range concept is not applicable?

In a case where the provisions of Range Concept are not applicable, the arm’s length price shall be the arithmetical mean of all the values included in the dataset. However, if the variation between the arm’s length price so determined and price at which the international transaction has actually been undertaken does not exceed 3% of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm’s length price [Rule 10CA(7)].

Confused about which regime is beneficial for FY 2020-21, use this calculator made in excel to compare the benefits of both regime. I hope you now understood what is “Range Concept in Transfer Pricing“.

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