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Meaning and Computation of arm s length price

Income Tax - Transfer Pricing - International + Domestic - 06 - Meaning and Computation of arm s length price Meaning of Arm s length price [Section 92F(ii)]: Arm s length price means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. In other words, it is the price that would have prevailed if the enterprises were at arm s length from each other i.e. where the enterprises involved were not controlled .....

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seller, or where prices are governed by the Government policy then transaction is said to be taking place under controlled conditions. Therefore to constitute arm s length price: The price should be applied or proposed to be applied in a transaction; The transaction is between unrelated persons; and The transaction is taking place in uncontrolled conditions. Computation of Arm s length price - [Sec. 92C(1)] The arm s length price shall be determined by any of the method specified in this section .....

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PM) Cost plus method; (CPM) Profit split method; (PSM) Transactional net margin method; (TNMM) Such other method as may be prescribed by the Board. (under rule 10AB) 92C(2): The most appropriate method refer to in sub section (1) shall be applied, for determination of arm length price in the manner as we prescribed. As per rule 10AB for the purpose of section of 92C (1) (f) The other method for determination of the arm s length price in relation to an international direction shall be in the meth .....

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led transaction means a transaction between enterprises other than associated enterprise, whether resident or non-resident; Compare the international transaction with uncontrolled transactions on the basis of guidelines given in rule 10B(2) and situation mentioned in rule 10B(3); Ascertain the most appropriate method by taking into account the factors discussed in rule 10C. The rule states that the method to be selected shall be the one best suited to the facts and circumstances of each internat .....

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l transaction. Provided, where more than one price is determined by the most appropriate method, the arm s length price shall be taken to be the arithmetical mean of such prices. [Proviso to section 92C(2)]. Provided further, if the variation between: (a) the arm s length price so determined , and (b) price at which international transaction has been actually undertaken, does not exceed such percentage not exceeding 3% of the latter (i.e. price at which international transaction has been actuall .....

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