New Definition of Arm’s Length Price of an International or Specified Domestic transaction as per the second proviso under sub-section (2) of Section 92C of Income-tax Act 1961
The Central Board of Direct Taxes (CBDT) has issued Notification No. 116/2024, redefining the Arm’s Length Price (ALP) under Section 92C of the Income-tax Act, 1961. This update applies for the assessment year 2024-2025, providing a new threshold for variation in pricing of international and specified domestic transactions.
Key Changes in Arm’s Length Price Determination
Under this notification, the Central Government, exercising its powers under Section 92C, has clarified that the price of an international or specified domestic transaction will be considered as the Arm’s Length Price if the variation between the transaction price and the ALP does not exceed:
- 1% for wholesale trading, and
- 3% for all other cases.
This means that if the price difference falls within these limits, the actual transaction price will be deemed to be the ALP for tax purposes.
Wholesale Trading Definition
For the purpose of this notification, the term “wholesale trading” applies to international or specified domestic transactions involving trading of goods, meeting the following criteria:
- Purchase cost of finished goods should account for 80% or more of the total cost associated with trading activities.
- The average monthly closing inventory of such goods should be 10% or less of sales related to the trading activities.
This revision ensures clarity for businesses engaged in wholesale trading and other international or domestic transactions, helping them comply with transfer pricing regulations while minimizing disputes related to pricing variations.
Conclusion
The CBDT’s Notification No. 116/2024 introduces important updates for businesses involved in cross-border and domestic transactions. By setting clear variation thresholds, it simplifies compliance with the arm’s length principle under Section 92C of the Income-tax Act.
Businesses should ensure they review these changes for accurate transfer pricing documentation and assessment compliance in the upcoming financial year.
To Access the CBDT Notification No. 116/2024 Click Here
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