The Indian Central Board of Direct Taxes (CBDT), which operates under the Department of Revenue in the Ministry of Finance, has established a transfer pricing tolerance range for both international and defined domestic transactions for the Assessment Year (AY) 2024-25, as stated in notification no. 116/2024 dated October 18, 2024. This adjustment is part of India’s ongoing efforts to simplify regulations, increase transparency and reduce potential disputes for multinational enterprises (MNEs) operating in the country.

Transfer pricing, a key component of international tax regulations, pertains to the pricing of transactions among related entities within a multinational group. Due to the involvement of varying tax jurisdictions, governments worldwide establish transfer pricing frameworks to ensure that profits are fairly allocated, and taxes are appropriately paid.

In India, transfer pricing is primarily governed by the Indian Income Tax Act, with the CBDT regulating the parameters to ensure that profits reported by Indian subsidiaries align with those generated in independent transactions. The transfer pricing tolerance range defines a margin within which MNEs can set prices for related-party transactions without facing adjustments or penalties. If a taxpayer’s price for a related-party transaction falls within this tolerance range, it is considered compliant. However, if the price deviates beyond the specified margin, the tax authorities may adjust the reported income, potentially leading to additional taxes and penalties.

For AY 2024-25, the CBDT has upheld a 1% tolerance range for wholesale trade and a 3% range for all other industries. This consistency highlights the government’s commitment to provide stability and predictability, allowing MNEs to plan pricing strategies with greater confidence. The 1% tolerance range for wholesale trading transactions reflects the government’s recognition of the narrow profit margins often associated with high-volume transactions. In contrast, the wider 3% tolerance range for other sectors acknowledges the varying levels of profitability across industries, providing greater flexibility for sectors with more variability in profit margins.

The CBDT’s tolerance range decision for the 2024-25 fiscal year is anticipated to significantly affect multinational enterprises operating in India. For businesses, maintaining transfer pricing within the defined margins is essential to avoid potential tax adjustments that could arise from transfer pricing audits. Businesses must focus on comprehensive documentation that clearly explains the rationale behind their transfer pricing strategies, minimizing the risk of disputes. The tolerance range allows businesses to conduct cross-border transactions with a reasonable margin, reducing the need for continuous adjustment and re-evaluations. However, MNEs are required to carefully define their price strategies, especially in sectors with volatile profit margins.

Transfer pricing has long been a critical issue in India, sparking numerous high-profile disputes. The complexity of the international taxation system, combined with India’s unique market features, has led to frequent disagreements between MNEs and tax authorities. The adoption of a defined tolerance range marks a proactive step by India toward minimizing such conflicts.

In conclusion, the CBDT's 2024-25 fiscal year transfer pricing regulations reflect a balanced approach, catering to India's revenue interests and the requirements of foreign investors. By maintaining predictable tolerance ranges, India is reinforcing its commitment to create a favorable investment climate and fostering trust among MNEs. For MNEs, aligning with these updated guidelines will be crucial to successfully navigate India’s complex yet promising economic landscape.

PHC  Advisory  is a company of  DP Group: an international professional services conglomerate of companies with approximately 100 experienced professionals worldwide. We offer comprehensive services in tax, accounting, and financial consulting, including financial supervision, financial audit, internal audit, internal control over financial reporting, and support for audited financial statements and annual audits, ensuring clients' financial transparency and compliance. 

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The content of this article is provided for informational purposes only, financial advice must be tailored to the specific circumstances on a case-by-case basis, and the contents of this article do not legally bind PHC Advisory with the reader in any way. 

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