Delhi ITAT: Determination of arm's length price is necessary for 5% benefit given in Circular 12/2001

Important and interesting judgment from Delhi Bench of Income Tax Appellate Tribunal (‘Delhi ITAT’) in case of UE Trade Corporation (India) Pvt. Ltd. v. Asst. CIT [ITA No.4460(Del)/2009]. In the case under review, Delhi ITAT opinioned that wherein the taxpayer has not determined the arm’s length price for an international transaction entered during the financial year with an associated enterprise then benefit of 5% given in circular 12/2001 is not available to the taxpayer. Further, Delhi ITAT also observed that the benefit of 5% available in the Income-tax Act (‘Act’), proviso to section 92C(2), is only available from the mean of prices and not from a single price. The case relates to assessment year 2003-04.

Facts

UE Trade Corporation (India) Pvt. Ltd. (‘the taxpayer’), was involved in import of pulses from its associated enterprise out side India. In order to justify the import price, the taxpayer considered Comparable Uncontrolled Price (‘CUP’) method as the most appropriate method. For the purpose of CUP, the taxpayer relied upon the price quotation available on “Agriwatch”. The case was selected for the scrutiny by the Assessing Officer (‘AO’), the AO also referred the case to the Transfer Pricing Office (‘TPO’) for determination of arm’s length price of inter company transactions. However, the TPO failed to give his report to the AO and accordingly AO himself determined the arm’s length price of international transactions. The AO also relied upon “Agriwatch” and suggested an addition in 6 import transactions.

In appeal before the Commissioner of Income Tax (Appeals) (‘CIT(A)’), the taxpayer got relief in 4 import transactions as the price determined by the AO was with in 5% from the price determined by the taxpayer. Both, the taxpayer and the AO went in appeal to Delhi ITAT. The issues relating to transfer pricing raised before Delhi ITAT and its observations are given below:

Benefit of 5% variation as per proviso to section 92C(2) of the Act

The proviso, which is applicable to the proceedings of this year, contemplates an option to the taxpayer to choose a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean. This proviso is applicable where more than one price is determined and thereafter the mean of such prices is taken to be arm’s length price. Delhi Tribunal also observed that position does not change even after the substitution of the older proviso by Finance (No.2) Act, 2009 by new two provisos.

Benefit of 5% variation as per circular 12/2001 issued by the Board

The Board circular states that where arm’s length price determined by the tax-payer is five per cent less or five per cent more than the price determined by the AO, the price declared by the taxpayer may be accepted. In the first limb of this paragraph, the Board has used the words “arm’s length price determined by the tax payer”, which means that on the basis of pricing study, the taxpayer has determined a price. In the second limb, the words used are “price declared by the tax payer” i.e., the taxpayer has determined the arm’s length price and thereafter declared such price for the purpose of transfer pricing adjustment. Delhi Tribunal observed that wherein the taxpayer has not determined the arm’s length price but the AO (or say TPO) determines an arm’s length price in such a case benefit of 5% is not available.

Aggregation of international transactions

When each transaction is separate transaction and not interconnected transactions, computation of arm’s length price needs to be done on transaction wise basis.

Though Delhi ITAT opinioned on some other issues also, however we feel either they have loose the gravity because of the amendment in the Act or they were not relating to transfer pricing.

Conclusion

To our understanding the most important take away would be determination of arm’s length price even if one may not have exact comparables for the transaction, we think that’s why it is said “Transfer Pricing is an Art and not a Science”

Best Regards

Gaurav Garg

Transfer Pricing Consultant

www.jgarg.com

+91 9899994934

gaurav@jgarg.com