FMV vs. ALP – Domestic Transfer Pricing

    Corresponding amendments in bringing the concept of ALP in the place of FMV are carried out in sec. 40A(2), sec. 80A, sec. 80IA(8) and sec. 80IA(10), etc. At the threshold the amendments create some confusion as to the concepts of FMV and ALP, which are explained as under:

    a) Sec. 40A (2) – proviso inserted to clause (a) reads as under:

    "Provided that no disallowance, on account of any expenditure being excessive or unreasonable having regard to the fair market value, shall be made in respect of a specified domestic transaction referred to in section 92BA, if such transaction is at arm's length price as defined in clause (ii) of section 92F."

    The wording of this proviso clearly indicates that FMV is different from ALP.

    b) Clause (iii) is inserted in Explanation to sec. 80A(6) which reads as under:

    "in relation to any goods or services sold, supplied or acquired means the arm's length price as defined in clause (ii) of section 92F of such goods or services, if it is a specified domestic transaction referred to in section 92BA."

    Explanation defines what is "market value" and adds clause (iii) as an additional dimension to such definition of market value. Here are we expected to understand ALP as synonymous with market value?

    c) Newly substituted explanation to sub-sec. 8 of 80-IA reads as under

    "For the purposes of this sub-section, "market value", in relation to any goods or services, means —

    (i) the price that such goods or services would ordinarily fetch in the open market; or

    (ii) the arm's length price as defined in clause (ii) of section 92F, where the transfer of such goods or services is a specified domestic transaction referred to in section 92BA."

    Plain reading suggests that FMV is synonymous with ALP

    d) Newly inserted proviso to sec. 80-IA(10) reads as under:

    "Provided that in case the aforesaid arrangement involves a specified domestic transaction referred to in section 92BA, the amount of profits from such transaction shall be determined having regard to arm's length price as defined in clause (ii) of section 92F."

    It suggests that only ALP needs to be adhered to, thereby it means that ALP is different from FMV.

    5.1 It is extremely important to remove this confusion of conflicting definitions of FMV and ALP. It is apparent from the very amendment that ALP is different and more scientific than FMV. Had it not been so there would not have been any requirement to bring in these amendments. In view of the same to avoid unwanted litigation CBDT has to clarify and remove the above explained confusion at the earliest.