The tolerance band / safe harbor for AY 2012-13 is effectively unchanged from the one available with respect to AY 2011- 12.
The guidance is: Notification No. 21/2012 [F. No. 500/185/2011 – FTD I].
Summary
Section 92(1) of India’s Income-tax Act, 1961, requires that income arising from an international transaction must be computed with regard to the arm’s length price.
Under section 92C(2), a “fixed” tolerance band of +/- 5% offered a safe harbor for taxpayers to use in determining the arm’s length prices. If the variation between the arm’s length price (determined under section 92C) and the price at which the international transaction was actually undertaken by the taxpayer did not exceed 5%, then the price of the international transaction would be deemed to be the arm’s length price.
The Finance Act 2011 amended this safe harbor provision, and instead of allowing a fixed tolerance band of +/- 5%, replaced it with an allowable variation that apparently could differ for different industries, depending on the economic cycles.
The recent notice provides the tolerance band of 5% for AY 2012-13—effectively providing the same safe harbor that was available for AY 2011-12.
KPMG observation
The Finance Act 2012 (which will apply for AY 2013-14 and later) prescribes a 3% rate as the “upper ceiling” of the tolerance band. Hence, it is possible that a lower percentage or industry-specific percentage (within the 3% range) could be provided in a future notice.
The August 2012 notice, thus, appears to have provided as broad a tolerance range as could be available for taxpayers for AY 2012 -13.
Read an August 2012 report [PDF 187 KB], prepared by the KPMG member firm in India: Tolerance band of 5 percent for Financial Year 2011-12 notified
Contact a tax professional with KPMG's Global Transfer Prcing Services.