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[Cites 0, Cited by 0] [Section 10CA] [Entire Act]

Union of India - Subsection

Section 10CA(8) in Income Tax Rules, 1962

(8)For the purposes of this rule,-
(a)"the thirty-fifth percentile" of a dataset, having values arranged in an ascending order, shall be the lowest value in the dataset such that at least thirty five per cent of the values included in the dataset are equal to or less than such value:
Provided that, if the number of values that are equal to or less than the aforesaid value is a whole number, then the thirty-fifth percentile shall be the arithmetic mean of such value and the value immediately succeeding it in the dataset;
(b)"the sixty-fifth percentile" of a dataset, having values arranged in an ascending order, shall be the lowest value in the dataset such that at least sixty five per cent of the values included in the dataset are equal to or less than such value:
Provided that, if the number of values that are equal to or less than the aforesaid value is a whole number, then the sixty-fifth percentile shall be the arithmetic mean of such value and the value immediately succeeding it in the dataset;
(c)"the median" of the dataset, having values arranged in an ascending order, shall be the lowest value in the dataset such that at least fifty per cent of the values included in the dataset are equal to or less than such value:
Provided that, if the number of values that are equal to or less than the aforesaid value is a whole number, then the median shall be the arithmetic mean of such value and the value immediately succeeding it in the dataset.Illustration 1. - The data for the current year of the comparable uncontrolled transactions or the entities undertaking such transactions is available at the time of furnishing return of income by the assessee and based on the same, seven enterprises have been identified to have undertaken the comparable uncontrolled transaction in the current year. All the identified comparable enterprises have also undertaken comparable uncontrolled transactions in a period of two years preceding the current year. The Profit level Indicator (PLI) used in applying the most appropriate method is operating profit as compared to operating cost (OP/OC). The weighted average shall be based upon the weight of OC as computed below :
Sl. No. Name Year 1 Year 2 Year 3 Current Year Aggregation of OC and OP Weighted Average
1 2 3 4 5 6 7
1 A OC = 100OP = 12 OC = 150OP = 10 OC = 225OP = 35 Total OC = 475Total OP = 57 OP/OC = 12%
2 B OC = 80OP = 10 OC = 125OP = 5 OC = 100OP = 10 Total OC = 305Total OP = 25 OP/OC = 8.2%
3 C OC = 250OP = 22 OC = 230OP = 26 OC = 250OP = 18 Total OC = 730Total OP = 66 OP/OC = 9%
4 D OC = 180OP = (-)9 OC = 220OP = 22 OC = 150OP = 20 Total OC = 550Total OP = 33 OP/OC = 6%
5 E OC = 140OP = 21 OC = 100OP = (-)8 OC = 125OP = (-)5 Total OC = 365Total OP = 8 OP/OC = 2.2%</p
6 F OC = 160OP = 21 OC = 120OP = 14 OC = 140OP = 15 Total OC = 420Total OP = 50 OP/OC = 11.9%
7 G OC = 150OP = 21 OC = 130OP = 12 OC = 155OP = 13 Total OC = 435Total OP = 46 OP/OC = 10.57%
From the above, the dataset will be constructed as follows :
SI. No. 1 2 3 4 5 6 7
Values 2.2% 6% 8.2% 9% 10.57% 11.9% 12%
For construction of the arm's length range the data place of thirty-fifth and sixty-fifth percentile shall be computed in the following manner, namely:Total no. of data points in dataset *(35/100)Total no. of data points in dataset *(65/100)Thus, the data place of the thirty-fifth percentile = 7*0.35=2.45.Since this is not a whole number, the next higher data place, i.e. the value at the third place would have at least thirty five per cent of the values below it. The thirty-fifth percentile is therefore value at the third place, i.e. 8.2%.The data place of the sixty-fifth percentile is = 7*0.65=4.55.Since this is not a whole number, the next higher data place, i.e. the value at the fifth place would have at least sixty five per cent of the values below it. The sixty-fifth percentile is therefore value at fifth place, i.e. 10.57%.The arm's length range will be beginning at 8.2% and ending at 10.57%.Therefore, if the transaction price of the international transaction or the specified domestic transaction has OP/OC percentage which is equal to or more than 8.2% and less than or equal to 10.57%, it is within the range. The transaction price in such cases will be deemed to be the arm's length price and no adjustment shall be required. However, if the transaction price is outside the arm's length range, say 6.2%, then for the purpose of determining the arm's length price the median of the dataset shall be first determined in the following manner:The data place of median is calculated by first computing the total number of data point in the dataset * (50/100). In this case it is 7*0.5=3.5.Since this is not a whole number, the next higher data place, i.e. the value at the fourth place would have at least fifty per cent of the values below it (median).The median is the value at fourth place, i.e., 9%. Therefore, the arm's length price shall be considered as 9% and adjustment shall accordingly be made.Illustration 2.-The data of the current year is available in respect of enterprises A, C, E, F and G at the time of furnishing the return of income by the assessee and the data of the financial year preceding the current year has been used to identify comparable uncontrolled transactions undertaken by entrprises B and D. Further, if the enterprises have also undertaken comparable uncontrolled transactions in earlier years as detailed in the table, the weighted average and dataset shall be computed as below:
Sl. No. Name Year 1 Year 2 Year 3 Current Year Aggregation of OC and OP Weighted Average
1 2 3 4 5 6 7
1 A OC = 100OP = 12 OC = 150OP = 10 OC = 225OP = 35 Total OC = 475Total OP = 57 OP/OC = 12%
2 B OC = 80OP = 10 OC = 125OP = 5   Total OC = 205Total OP = 15 OP/OC = 7.31%
3 C OC = 250OP = 22 OC = 230OP = 26 OC = 250OP = 18 Total OC = 730Total OP = 66 OP/OC = 9%
4 D   OC = 220OP = 22   Total OC = 220Total OP = 22 OP/OC = 10%
5 E     OC = 100OP = (-)5 Total OC = 100Total OP = (-)5 OP/OC = (-)5%</p
6 F OC = 160OP = 21 OC = 120OP = 14 OC = 140OP = 15 Total OC = 420Total OP = 50 OP/OC = 11.9%
7 G OC = 150OP = 21 OC = 130OP = 12 OC = 155OP = 13 Total OC = 435Total OP = 46 OP/OC = 10.57%
From the above, the dataset will be constructed as follows :
SI. No. 1 2 3 4 5 6 7
Values (-)5% 9% 9.56% 10.57% 11.35% 11.9% 12%
If during the course of assessment proceedings, the data of the current year is available and the use of such data indicates that B has failed to pass any qualitative or quantitative filter or for any other reason the transaction undertaken is not a comparable uncontrolled transaction, then, B shall not be considered for inclusion in the dataset. Further, if the data available at this stage indicates a new comparable uncontrolled transaction undertaken by enterprise H, then, it shall be included. The weighted average and dataset shall be recomputed as under :
Sl. No. Name Year 1 Year 2 Year 3 Current Year Aggregation of OC and OP Weighted Average
1 2 3 4 5 6 7
1 A OC = 100OP = 12 OC = 150OP = 10 OC = 225OP = 35 Total OC = 475Total OP = 57 OP/OC = 12%
2 C OC = 250OP = 22 OC = 230OP = 26 OC = 250OP = 18 Total OC = 730Total OP = 66 OP/OC = 9%
3 D   OC = 220OP = 22 OC = 150OP = 20 Total OC = 370Total OP = 42 OP/OC = 11.35%
4 E     OC = 100OP = (-)5 Total OC = 100Total OP = (-)5 OP/OC = (-)5%
5 F OC = 160OP = 21 OC = 120OP = 14 OC = 140OP = 15 Total OC = 420Total OP = 50 OP/OC = 11.9%
6 G OC = 150OP = 21 OC = 130OP = 12 OC = 155OP = 13 Total OC = 435Total OP = 46 OP/OC = 10.57%
7 H OC = 150OP = 12   OC = 80OP = 10 Total OC = 230Total OP = 22 OP/OC = 9.56%
From the above, the dataset will be constructed as follows :
SI. No. 1 2 3 4 5 6 7
Values (-)5% 9% 9.56% 10.57% 11.35% 11.9% 12%
Illustration 3. - In a given case the dataset of 20 prices arranged in ascending order is as under :
Sl. No. Profits (in Rs. Thousand)
1 2
1 42.00
2 43.00
3 44.00
4 44.50
5 45.00
6 45.25
7 47.00
8 48.00
9 48.15
10 48.35
11 48.45
12 48.48
13 48.50
14 49.00
15 49.10
16 49.35
17 49.50
18 49.75
19 50.00
20 50.15
Applying the formula given in the Illustration 1, the data place of the thirty-fifth and sixty-fifty percentile is determined as follows:Thirty-fifth percentile place = 20* (35/100) = 7.Sixty-fifth percentile place = 20* (65/100) = 13.Since the thirty-fifth percentile place is a whole number, it shall be the average of the prices at the seventh and next higher, i.e.; eighth place. This is (47+48)/2 = Rs.47,500.Similarly, the sixty-fifth percentile will be average of thirteenth and fourteenth place prices. This is (48.5+49)/2=Rs.48,750The median of the range (the fiftieth percentile place) = 20*(50/100)=10Since the fiftieth percentile place is a whole number, it shall be the average of the prices at the tenth and next higher, i.e.; eleventh place. This is (48.35+48.45)/2= Rs.48,400.Thus, the arm's length range in this case shall be from Rs.47,500 to Rs.48,750.Consequently, any transaction price which is equal to or more than Rs.47,500 but less than or equal to Rs.48,750 shall be considered to be within the arm's length range.