Income Tax Act Amended

The Income-tax Act, 1961 is the charging Statute of Income Tax in India. It provides for levy, administration, collection and recovery of Income Tax. The Income-tax Act provides for determination of income having regard to Arm’s Length Price (ALP) in case of international transactions and specified domestic transactions.

The provisions of the Income-tax Act were amended through the Finance (No.2) Act, 2014 to facilitate alignment of Indian transfer regime with international best practices.The manner of computation of ALP is laid down under the Income-tax Rules.

current affairsThe Government has notified the amended Rules for determining ALP vide S.O. No. 2860 (E) dated 19/10/2015. The amended regime will be applicable for computation of ALP of international transactions and specified domestic transactions undertaken on or after 1/04/2014.

The amended rules allow for introduction of a “range concept” for determination of ALP and “use of multiple year data” for undertaking comparability analysis in transfer pricing cases.

The use of range concept, being a statistical tool, enhances the reliability of analysis undertaken for computation of ALP. The range concept will be applicable in certain cases for determining the price and will begin with the 35th percentile and end with the 65th percentile of the comparable prices.

Transaction price shown by the taxpayers falling within the range will be accepted and no adjustment will be made.The use of multiple year data allows for yearly variations to be averaged out and would therefore add value to transfer pricing analysis.

The amended rules would therefore provide clarity in determination of price in transfer pricing cases and reduce disputes on transfer pricing issues. It is a part of the Government’s continuing initiative of providing a stable and certain direct tax regime.

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Litigation on transfer pricing issues has reached humongous proportion in India. The existing law of the use of arithmetic mean for determination of arm’s length price can be credited as a major igniter of such litigations as arithmetic mean had a tendency to be skewed by outlier comparables.

Considering this limitation, the Hon’ble Finance Minister announced the introduction of ‘range’ concept in his speech while presenting Budget 2014.

The Finance Minister, Mr. Arun Jaitley, in his budget 2014 speech had made an announcement that to align Indian transfer pricing (‘TP’) regulations with the best available practices, the range concept for determination of arm’s length price (‘ALP’) would be introduced in the Indian TP regime.

Further, as per the existing Indian TP regulations, only one year data is allowed to be used for comparability analysis with some exception. The Finance Minister had proposed to amend the regulations to allow use of multiple year data.

In light of the above announcements, the Central Board of Direct Taxes (‘CBDT’), on May 21, 2015, has announced the draft rules on the application of range concept and use of multiple year data. These draft rules, when finalised, would be applicable only for international transaction or domestic transaction undertaken on or after April 1, 2014.

Accordingly, the rules would be applicable from Assessment Year 2015-16 (Financial Year 2014-15) onwards in line with the proviso added to Section 92C of the Income-tax Act, 1961 by an amendment in Finance Act, 2014.

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