I-T department notifies tolerance range for AY25 for transfer pricing cases

The income tax department has notified the tolerance range for variation between arm's length price and transfer pricing for international and specified domestic transactions for Assessment Year 2024-25.

The range has been retained at the same level as last year's -- one per cent for "wholesale trading" and three per cent for all other taxpayers, the Central Board of Direct Taxes (CBDT) said.

The term 'wholesale trading' will be defined as an international transaction or specified domestic transaction of trading in goods subject to certain conditions. "The notification of tolerance range shall provide certainty to taxpayers and reduce the risk perception associated with the pricing of a transaction in transfer pricing," the CBDT said in a statement.

The 'tolerance range' means that if the arm's length price varies up to one per cent of the transaction price for wholesale trading and three per cent for other taxpayers, then the transaction price would be the arm's length price under the transfer pricing rules.

Under tax laws, transfer pricing refers to the pricing of the goods and services that are exchanged between related companies. Arm's length price refers to the price which is applied in a transaction between entities other than related parties.

Nangia & Co LLP Partner - Transfer Pricing Nitin Narang said the recently notified tolerance range for transfer pricing is applicable for cases where arithmetical mean is considered for computation of arm's length price/ margin.

"The notification of tolerance range also suggested that it shall provide certainty to taxpayers and reduce the risk perception associated with pricing of a transaction in transfer pricing.

Similar to preceding years, no specific reason or clarification is given in relation to why a different tolerance limit is set for wholesale traders and others, and how the range of 3 per cent has been determined," Narang added.