Draft rules on ‘Range’ and ‘Multiple Year Data’ – An aid or woe?
Rakesh Nangia  and  Amit Bhalla 18 June 2015
‘Range’ and ‘multiple year data’ are among the best transfer-pricing practices and also closer to economic realities wherein prices, and or margins, are compared to those within a range and not at to a particular point
The introduction of concepts of ‘range’ and ‘multiple year data’ in Indian Transfer Pricing (TP) regime is a welcome step towards alignment of Indian TP regulation with developed international TP practices.  The concept of ‘range’ will furnish a more accurate result for Arm’s Length Price (ALP), as the extreme results or outliers comparable would be left out of the range which does not happen while using the arithmetic mean approach. Similarly, the usage of multiple years’ data shall help in improving the overall exercise of comparability analyses.  The use of both the concepts are amongst the globally accepted best TP practice and also closer to economic realities wherein prices, and or margins, are compared to those within a range and not at to a particular point.
Finance Minister Arun Jaitley, while presenting the Finance Bill made an announcement that ‘range concept’ would be introduced in Indian Transfer Pricing (TP) regulations. In addition to the same, it was announced that the ‘use of multiple year data’ would also be allowed for undertaking comparability analysis. The principal intent of announcing the aforesaid concept was to make Indian TP regime with the globally followed TP practices. The other purpose of ushering in the same was to reduce the prolonged and unwarranted TP litigation.  
The announcement of ‘range concept’ and ‘use of multiple year data’ was the result of the Finance Minister’s prompt sensing of the exhort of epitome shift of the Indian TP regime and thereby squaring off lengthy and unwarranted litigation issues.  Consequent to the same, section 92C(2) of the Income-tax Act, 1961 (the Act) was amended by the Finance Act 2014, to provide that where more than one price is determined by application of the most appropriate method, the Arm’s Length Price (ALP) in relation to an international transaction or specified domestic transaction undertaken on or after the 1st day of April, 2014 shall be computed in such manner as may be prescribed.
In this connection, Central Board of Direct Taxes (CBDT) has recently issued the much awaited draft scheme for the application of ‘range concept’ and use of ‘multiple year data’ for determining the ALP.  These draft rules, once get finalised, would be applicable to all international transactions and specified domestic transactions undertaken by the taxpayers with its associated enterprises (AEs) during and subsequent to the financial year ending 31 March 2015.  Seeking public comments before issuing final rules, is a laudable initiative taken by the Government that has given opportunities to corporate and stakeholders to provide their comments and concerns in this regard.  The proposed scheme, which lays down the terms and conditions in relation to the use of ‘range concept’ and the concept of ‘use of multiple year data’ along with our corresponding remarks, have been discussed in the following sections of this article: 

The ‘Range’ Concept

The draft rules further provides that in case if the transfer price of the tested party falls outside the range (i.e. 40th to 60th percentile), the median of the range will be considered as ALP and adjustment to transfer price shall require be made accordingly.   If the transfer price is within the range, no adjustment shall be made. 
The introduction of range concept would facilitate in determination of more accurate ALP as the loss making or the abnormal profit making comparables would be left out of the range and would not influence the ALP as it generally happens while computing ALP through using arithmetic mean concept.

Use of ‘Multiple Year Data’ Concept


The draft rules have proposed the use of multiple year data which has been a matter of significant litigation and debate so far.  Our observations/ comments with respect to draft rules in relation to the use of multiple year data are provided as below:
Multiple year data would apply whether the ALP has been determined through range concept or arithmetic mean. In case the range concept does not apply, the arithmetic mean concept shall continue to apply as it is applied in the existing scenario along with the benefit of tolerance range (3% in for all the taxpayers other than wholesale distributors and 1% for wholesale distributors).

Concluding Remarks

Our few final remarks in relation to the introduction of the concepts of ‘range’ and ‘use of multiple year data’ are provided as below:
ƒ˜ The requirement of having minimum nine comparable companies for the application of range concept may lure the tax authorities to intentionally cull out certain comparable companies and apply the concept of arithmetic mean in case of the taxpayers which would finally nullify the concept of introducing the concept of range in the Indian TP regime.  It is thus, recommended that the ‘inter-quartile range’ shall substitute the proposed 40th to 60th percentile range to make it in line with the global TP practices.  This may eventually help in negotiating the bilateral advance pricing arrangements or MAP proceedings with number of developed countries following the concept of ‘inter quartile range’ concept. In addition to the same, the computation mechanism for determination of range should also be provided in the rules.
ƒ˜ The usage of range and multiple year data should be extended to other methods also.
ƒ˜ The minimum number of comparables can be reduced from nine to a lesser number in the light of practical difficulties.
We are hopeful that these concepts help in reducing the TP litigation in India subject to above suggestions and recommendations.
(Rakesh Nangia is Managing Partner and Amit Bhalla is Senior Manager at Nangia & Co)


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