INDIA Law and Practice Contributed by: Deepak Chopra, Harpreet Singh Ajmani, Rohan Khare, Pulkit Pandey and Priyam Bhatnagar, AZB & Partners
how the responsibilities, risks and benefits are to be divided between the respective par - ties to the transactions; and • conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical loca - tion and size of the markets, the laws and government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. It is further mandated that an uncontrolled trans - action shall be comparable to an international transaction or a specified domestic transaction if: • none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or • reasonably accurate adjustments can be made to eliminate the material effects of such differences. CBDT has prescribed the “other method” by inserting Rule 10AB to the IT Rules. For deter - mination of ALP in relation to an international transaction, the “other method” shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non- AE, under similar circumstances, considering all the relevant facts. Generally speaking, the other method acts as “residuary method” , which allows taxpayers some flexibility for using data around prices that would have been charged between third par -
ties under a comparable scenario for the arm’s length exercise. However, in the authors’ experi - ence, the “other method” is subjected to a high - er threshold of contemporaneous evidence for being selected as the most appropriate method. 3.3 Hierarchy of Methods As mentioned, the OECD Transfer Pricing Guide - lines outline five transfer pricing methods (refer to 3.1 Transfer Pricing Methods ), which are seg - regated into two general categories: (i) traditional transaction methods (CUP, RPM & CPM) and (ii) transactional profit methods (PSM and TNNM). Further, the OECD Transfer Pricing Guidelines do not provide any hierarchy per se within the transfer pricing methods enumerated in 3.1 Transfer Pricing Methods . Nonetheless, tradi - tional transaction methods are commonly con - sidered a most direct way of determining ALP, since reliance is placed on comparable data from uncontrolled transactions with conditions such as product, entity and market character - istics, contractual terms, assets employed in the transaction, functions and risks assumed by each party, highly similar to the transaction under review. On the other hand, transactional profit methods focus more on the specific trans - actions between related parties and rely more on internal data. Such an approach of the OECD has also been adopted by the Indian Revenue Authorities and, as mentioned, the traditional or the transactional profit methods are preferred over the usage of the residuary method. 3.4 Ranges and Statistical Measures Until March 2014, to arrive at ALP, the margin of the tested party (company with which the mar - gin is to be compared) was compared with the arithmetic mean of the comparable companies.
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