Direct Tax alert: CBDT notifies tolerance range under transfer pricing for AY 2024-25

Background:

The Ministry of Finance has issued Notification No. 116/2024 dated October 18, 2024, for determining the variation for arm’s length price (ALP) in international and specified domestic transactions under Section 92C of the Income-tax Act, 1961. This notification provides a tolerance range for the AY 2024-2025, aimed at ensuring compliance and reducing disputes in transfer pricing cases.

Key Provisions of the Notification:

Tolerance Range for Variations in Arm’s Length Price (ALP): The notification specifies a tolerance range for variations between the ALP and the actual price of transactions:

• wholesale trading transactions, a variation of up to 1% of the actual price is acceptable.

Clarification on Wholesale Trading-

For a transaction to qualify as ‘wholesale trading’, the following conditions must be met:

1. purchase cost of finished goods is 80% or more of the total cost pertaining to such trading activities; and
2. average monthly closing inventory of such goods is 10% or less of sales pertaining to such trading activities.

• For all other transactions, a variation of up to 3% of the actual price is acceptable.

Impact:

The notification applies to the AY 2024-2025, providing relief to taxpayers by allowing minor deviations from the arm’s length price without triggering adjustments or penalties. The retrospective effect given to the notification will not adversely affect any taxpayer.

Priyanka Saini

Associate – Direct Taxation, SW India