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CA Final · Direct Tax Laws & International Taxation · Latest Developments in International Taxation

Case: Kaveri Tech Pvt Ltd, an Indian company, has a foreign associated enterprise that owns 100% of its shares. For the previous year, it entered into international transactions aggregating Rs 40 crore. The arm's length price of one transaction was Rs 100 lakh, whereas the price actually charged was Rs 102 lakh. The tolerance band for the relevant category is 3% of the transaction price. What is the arm's length price to be adopted for computing total income under the proviso to section 92C(2), as applicable for the year?

The arm's length price to adopt is Rs 102 lakh, the price actually charged. The variation from the computed ALP of Rs 100 lakh is about 2%, within the 3% tolerance band, so the transaction price is accepted and no transfer pricing adjustment is made.

  1. ARs 100 lakh, as the variation is within the tolerance band
  2. BRs 102 lakh, as the price actually charged is acceptedCorrect
  3. CRs 101 lakh, being the mean of the two
  4. DRs 98 lakh, being the lower end of the band

Explanation

Variation: price charged is 102; ALP 100; difference 2 lakh, which is 1.96% of 102, or 2% of ALP, within 3%. When the variation does not exceed the tolerance range, the price actually charged is accepted as the ALP, so no adjustment arises. Using Rs 100 lakh would wrongly adjust income.

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