CBDT Defines Tolerance Range for Transfer Pricing in AY 2024-25

The income tax department has defined tolerances for arm's length variations in transfer pricing for AY 2024-25, retaining a 1% tolerance for wholesale trading and 3% for others. This aims to provide certainty and reduce risk perception for taxpayers engaging in international and specified domestic transactions.

The income tax department has outlined the tolerance range for deviations between arm's length prices and transfer pricing for the Assessment Year 2024-25. The Central Board of Direct Taxes (CBDT) announced that the tolerance range remains unchanged from last year—1% for 'wholesale trading' and 3% for all other taxpayers.

Wholesale trading is defined as an international transaction or specified domestic transaction of goods under certain conditions, according to the CBDT. The body's statement emphasized the notification's role in ensuring taxpayer certainty while reducing risk perception in pricing transactions within transfer pricing parameters.

Transfer pricing involves setting prices for goods and services exchanged between related companies, while arm's length pricing concerns transactions between unrelated entities. Nitin Narang of Nangia & Co LLP pointed out that this rule applies when an arithmetical mean is used to determine the arm's length price. However, there is no specific explanation for the differing tolerance limits for wholesale traders and others.