Computation of arm’s length price - Section 92C - International Taxation - Income Tax

Computation of arm s length price - Section 92C Meaning of Arm s length price: Arm s length price means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. In other words, it is the price that would have prevailed if the enterprises were at arm s length from each other i.e. where the enterprises involved were not controlled, influenced by or associated with another enterprises. It is the price that would have existed between enterprises, not associated or related with each other. Uncontrolled Conditions : Conditions which are not controlled or suppressed or moulded for achievement of a pre-determined results are said to be uncontrolled conditions. If a buyer is related to a seller, or where prices are governed by the Government policy then transaction is said to be taking place under controlled conditions. Therefore to constitute arm s length price: The price should be applied or proposed to be applied in a transaction; The transaction is between unrelated persons; and The transaction is taking place in uncontrolled conditions. Computation of Arm s length price: The arm s length price in relation to an international transaction or specified domestic transaction shall be determined by any of the method specified in this section, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons. Where an assessee has entered into various types of international transactions with associated enterprises, arm s length price should be determined on a transaction-by-transaction basis and not on an aggregate basis- Development consultants (P) Ltd. v. CIT 2008 (4) TMI 340 - ITAT CALCUTTA-A Methods of computing arm s length price Arm s length price can be computed by the following methods : Comparable uncontrolled price method; (CUPM) Resale price method; (RPM) Cost plus method; (CPM) Profit split method; (PSM) Transactional net margin method; (TNMM) Such other method as may be prescribed by the Board. The most appropriate method shall be applied, for determination of arm length price in the manner as prescribed above. More than one ALP - that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices if the variation between: (a) the arm s length price so determined , and (b) price at which international transaction has been actually undertaken, does not exceed such percentage not exceeding 3% of the latter (i.e. price at which international transaction has been actually undertaken) as may be notified by the Central Government in the Official Gazette in this behalf, then the price at which international transaction has actually been undertaken shall be deemed to be the arm s length price and no adjustment is required to be made. If the arithmetic means is not within the percentage as may be notified (maximum however is 3%) of price at which the international transaction has actually been undertaken, then arithmetical mean of arms length price shall be treated as arm s length price and accordingly adjustment will be required to be made. Note:- where the variation between the arm s length price determined under section 92C of the said Act and the price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed 1% of the latter in respect of wholesale trading and 3% of the latter in all other cases, 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 for the Assessment year 2023-2024. [ Notification No. 46/2023 Dated 26th June 2023 ] assessment year 2024-2025. [ Notification No. 116/2024 Dated 18.10.2024 ] Determination Arm s length price by Assessing officer: When the AO, on the basis of information or document in his possession is of the opinion that : Price has not been determined in accordance with section 92 or Data used for computing arms length price is not reliable or not correct, or Documents are not maintained by assessee in accordance with section 92D , or Assessee has failed to furnish information with in specified time required u/s 92D Then AO can determine the arms length price on the basis of information in his possession, Provided that an opportunity of being heard shall be given by the AO to the Assessee. Total Income: Where an arm s length price is determined by the Assessing Officer u/s 92C(3), the Assessing Officer may compute the total income of the assessee having regard to the arm s length price so determined: Provided that no deduction u/s 10AA or under chapter VI-A shall be allowed on the increased income. Provided further that income of other enterprise shall not be recomputed for the purpose of Chapter of TDS i.e., other party cannot claim the refund of TDS. Range Concept : where in case of data set has more than 5 value then in such a case for the determination of Arm Length Price assessee shall follow Rule 10CA .