In a notification issued late night, CBDT also set the condition for transfer pricing stating “purchase cost of finished goods is 80% or more of the total cost pertaining to such trading activities and average monthly closing inventory of such goods is 10% or loss of sales pertaining to such trading activities.”
Transfer pricing refers to the accounting mechanism used to determine the price of goods and services transferred between associated enterprises, such as between a parent company and its subsidiaries.
This mechanism, introduced in the law as per the guidelines by Organisation for Economic Co-operation and Development (OECD), aims to ensure that transactions between related parties reflect market forces and companies are paying the correct tax.
This is relevant in the case of a multinational company having subsidies, where they may determine the value of Good and services below or above the market value to manipulate profit or loss.
The tolerance range is the acceptable variation between the arm’s length price determined and the price at which a specific international or domestic transaction was actually undertaken. The retained tolerance range will provide continuity and stability for taxpayers, particularly multinational companies, allowing them to conduct transactions without excessive risk of disputes over pricing.
