Thus, it does not permit the use of an arm’s length range of prices. Use of arm’s length range is not permittedĦ.4 The section provides that the arm’s length price shall be the arithmetic mean of the prices determined. In such cases, an attempt should be made to reach a conclusion consistent with the arm’s length principle that is satisfactory from a practical viewpoint to all the parties involved, taking into account the facts and circumstances of the case, the mix of evidence available, and the relative reliability of the various methods under considerations.” (para 1.69) However, for difficult cases, where no one approach is conclusive, a flexible approach would allow the evidence of various methods to be used in conjunction. “While in some cases the choice of a method may not be straightforward and more than one method may be initially considered, generally it will be possible to select one method that is apt to provide the best estimation of an arm’s length price. In this connection, the OECD Guidelines provide as follows: Selection of only one method is permittedĦ.3 The section stipulates selection of one method which is the most appropriate method. Thus, the Guidelines permit application of method not specified in them. However, a taxpayer should maintain and be prepared to provide documentation regarding how its transfer prices were established.” (para 1.68) Moreover, MNE groups retain the freedom to apply methods not described in this Report to establish prices provided those prices satisfy the arm’s length principle in accordance with these Guidelines. Tax administrators should hesitate from making minor or marginal adjustments. “No one method is suitable in every possible situation and the applicability of any particular method need not be disproved.

Selection of a stipulated method alone is permittedĦ.2 The section provides that the arm’s length price shall be determined by applying a method specified in it.

If 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.

The most appropriate method shall be applied in the manner prescribed by the Board for determination of arm’s length price.

The most appropriate method shall be ascertained having regard to the nature or class of transactions or class of associated persons, etc.

The arm’s length price shall be determined by the most appropriate method which shall be one out of the methods specified.Paraphrasing, the provisions of section 92C(1) and (2) stipulate the following: Provided that where more than one price may be determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices.” (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm’s length price in the manner as may be prescribed: such other method as may be prescribed by the Board.(1)The arm’s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transactions or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely:. The provisions relating to determination of arm’s length price are contained in section 92C which provides as follows:

Thus, the definition provides that a price at which independent enterprises deal with each other (which is ordinarily determined by market forces), should be reckoned as the arm’s length price. Section 92F(ii) defines arm’s length price as ‘a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions.’ 6.1 The income arising from an international transaction is required to be computed having regard to the arm’s length price.

Definition arms length transaction