The CBDT guidance provides:
Other method of determination of [arm’s length price]
10AB. For the purpose of clause (f) of sub-section (1) of Section 92C of the Income-tax Act (the Act), the other method for determination of the arm’s length price in relation to an international transaction shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts.
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3. In rule 10B of the said rules, in sub-rule (1) after clause (e), the following clause shall be inserted, namely:—
“(f) Any other method as provided in rule 10AB….”
Effect of “other method”
This “other method” rule change allows taxpayers flexibility to select a method other than the five prescribed methods for computing the arm’s length price for routine transactions (e.g., such as reimbursements) and non-routine transactions (e.g., transfers of intangibles).
This change also could allow taxpayers to credibly rely on data referred to in commercial negotiations, data points reflecting market conditions, and other persuasive evidence to help establish the arm’s length price of a transaction.
The new guidance appears to support a price-based method (i.e., an expansion of the comparable uncontrolled price method) rather than a profit-based method.
When “other method” could be used
The “other method” could be used in instances of:
- Use of the revenue split / allocation in situations of investment banking, logistics, and similar complex uncontrolled transactions
- Use of tender documents or price quotations to demonstrate arm’s length intent in situations of a loan or guarantee transaction
- Reliance on the standard rate cards
For application of the “other method,” a taxpayer would still have to satisfy the comparability factors.
The “other method” rule’s effective date is 1 April 2012, and it applies to Assessment Year 2012-13 and subsequent years. However, it may carry a degree of persuasive value for past years.
The “other method” rule still relies on the availability of the same or similar uncontrolled transactions for the purpose of benchmarking analysis. Therefore, the availability of the “other method” in a situation when no comparable uncontrolled transactions are available would still be a challenge for taxpayers.
OECD Guidelines permit the use of any other method, and state that taxpayers are free to apply methods not described to establish prices—provided those prices satisfy the arm’s length principle.
In selecting “other method” as the most appropriate method, taxpayers will still have to maintain documentation explaining why they rejected any of the five prescribed methods and why the “other method” is considered appropriate to the facts and circumstances of the situation.
The “other method” rule may still not include the business strategies as a factor for determining the comparability of controlled and uncontrolled transactions; yet, the provisions contained in the proposed advanced pricing agreement (APA) seem to provide more flexibility.
In general, the new “other method” provides a welcome change to the rules governing the methods for computing the arm’s length price. However, taxpayers need to consider the practical application and implementation of the “other method.”
To read this May 2012 report, prepared by the KPMG member firm in India: CBDT specifies rules for application of “other method” for computation of arm’s length price (PDF 193 KB)