Central Government Sets Arm's Length Price Thresholds for Wholesale and Other Transactions under Income Tax Act [Read Notification]

The Central Government, vide notification no. S.O. 4571(E) dated 18th October 2024 has issued a notification under the Income-tax Act, 1961, setting specific thresholds for determining arm’s length prices in international and specified domestic transactions.

This notification, which exercises powers under Section 92C(2) of the Act and sub-rule (7) of Rule 10CA of the Income-tax Rules, 1962, establishes that for the assessment year 2024-2025, the variation between the arm’s length price determined under Section 92C and the actual price of a transaction should not exceed (i) one percent for wholesale trading, and (ii) three per cent for all other cases. If the variation falls within these limits, the actual price at which the transaction has been conducted will be considered the arm's length price for tax purposes.

Critical EPF & ESI Act Provisions – Interpreted by the Supreme Court - To know more

Arm’s length pricing is a key requirement under transfer pricing regulations to ensure that transactions between related parties are conducted on fair market terms, preventing tax avoidance.

Additionally, the notification clarifies the criteria for classifying transactions as "wholesale trading." For a transaction to qualify, the purchase cost of finished goods must account for at least 80% of the total cost of the trading activities, and the average monthly closing inventory must be 10% or less of sales. This detailed definition ensures that only high-volume, low-inventory turnover transactions are considered wholesale trading, subject to the stricter one per cent variation limit.

The Explanation in the notification states as follows:

“Explanation.- For the purposes of this notification, “wholesale trading” means an international transaction or specified domestic transaction of trading in goods, which fulfils the following conditions, namely:-

a. purchase cost of finished goods is eighty per cent. or more of the total cost pertaining to such trading activities; and

Critical EPF & ESI Act Provisions – Interpreted by the Supreme Court - To know more

b. average monthly closing inventory of such goods is ten per cent. or less of sales pertaining to such trading activities.”

To Read the full text of the Order CLICK HERE

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