Multinational companies and Indian industrial houses that have spread their wings abroad can raise a toast to the Income-Tax Department. In times of economic woe, the Tax Department has shown its generosity by retaining the tolerance band for transfer pricing adjustment at five per cent for the financial year 2011-12. Simply put, the Tax Department has promised that it would not resort to transfer pricing adjustments in cases where the variation between the actual price of the transaction and the arm’s length price (ALP) does not exceed 5 per cent of the transaction price. In such cases, the actual price will be treated as the ALP. The Tax Department’s latest move comes more than 15 months after the passage of Budget 2011-12. Industry expressed some surprise on two counts — one, the Tax Department taking a call and actually specifying a tolerance band and, two, retaining the 5 per cent tolerance band. Budget 2011-12 had empowered the Centre to notify the allowable variable percentages for different industries from time to time. The Centre has now specified 5 per cent tolerance band for financial year 2011-12 for all industries.
TRANSFER PRICING NORMS OUT, TO EASE TAX WOES: The finance ministry has decided to bring in greater clarity in transfer pricing norms. A senior finance ministry official said as the first step, the government issued a notification on Friday to clear doubts over the possibility of changes in the permissible variations from the market price to the arm’s length price for assessment year 2012-13. The notification said where the variation between the arm’s length price determined under Income Tax Act provisions and the price at which an international transaction had been undertaken did not exceed five per cent of the latter, the price at which the transaction took place would be taken as the arm’s length price. The arm’s length price is critical for companies with international operations and subsidiaries trading with each other. There is often an incentive to reduce the overall tax burden by manipulation of inter-company prices. The finance ministry’s decision to allow a five per cent variation this year is significant, as the Finance Act 2012 has fixed an upper ceiling of three per cent as the tolerance range for determining the arm’s length price from assessment year 2013-14 onwards.
