2009 (12) TMI 675 - AT - Income Tax

Transfer pricing adjustment - International transaction - margin of plus - minus 5 per cent to the arm s length price - Most Appropriate Method of Accounting - difference between the arm s length price determined by the assessee and by the AO - AO noted that wherein international transactions exceeds Rs. 1 crore the assessee was required to maintain all the records as per section 92D read with rule 10D of the Income-tax Rules. Since the assessee has not maintained any record which has been admitted by the assessee itself and the fact remains that the transfer pricing study has not been undertaken by the assessee also the margin of 10 per cent is not correct arm s length price. In IT enabled business services the margin varies from 10 to 20 per cent. Under the circumstances AO adopted 15 per cent as the margin and applying the same to the gross revenue income was enhanced being adjustment in the arm s length price. Since the assessee could not present itself before the CIT(A) no further argument could be raised and hence this addition was confirmed. The controversy is in cases where the International Price shown in related party transaction exceeds 5 per cent of the Arithmetic mean envisaged by the provision and such Arm s Length Price is contested by the taxpayer. According to the revenue in such a situation the second limb of the provision is not applicable. HELD THAT - As per section 92(1) the arm s length price in relation to international transaction is to be determined by any of the most appropriate method prescribed therein. When the nature of transaction is such that the arm s length price can be determined by applying only one of the most appropriate method and it needs not to be determined by applying 2 or more methods in such a situation even the price determined by applying only one of the most appropriate method will become the arithmetical mean price. Therefore where the arithmetical mean price even if determined by one of the most appropriate method do not exceed 5 per cent of the price determined by the assessee at the option of the assessee as per the arm s length price determined by him. Therefore when the difference between the arm s length price determined by the assessee and by the AO are not varying more than 5 per cent compared to the price determined by the assessee no further adjustments are desirable. ITAT Delhi in the case of Sony India (P.) Ltd. 2008 (9) TMI 420 - ITAT DELHI-H held that price determined on application of most appropriate method is only an approximation and is not a scientific evaluation. In such a situation giving the margin of plus- minus 5 per cent to the arm s length price determined by the assessee since the same is not exceeding 5 per cent no further adjustments are required. We therefore delete the addition. In the result the appeal is partly allowed.

Summary

Issues Involved:
1. Determination of arm's length price for international transactions.
2. Applicability of the 5% margin proviso under section 92C(2) of the Income-tax Act, 1961.
3. Compliance with transfer pricing documentation requirements under section 92D.

Issue-wise Detailed Analysis:

1. Determination of Arm's Length Price for International Transactions:
The assessee-company, a branch office of Electrobug Technologies Ltd., U.K., filed its first return since incorporation. The company's main business involved retrieving and extracting data for clients of its head office, invoicing on a cost-plus-margin method with a 10% margin. The Assessing Officer (AO) noted that the international transactions exceeded Rs. 1 crore and required the assessee to justify that the transactions were at arm's length. The AO found the 10% margin inadequate, stating that margins in IT-enabled business services ranged from 10% to 20%. Consequently, the AO adjusted the margin to 15%, enhancing the gross revenue by Rs. 12,57,885.

2. Applicability of the 5% Margin Proviso under Section 92C(2) of the Income-tax Act, 1961:
The assessee argued that the adjustment in arm's length price was within the 5% range specified in the proviso to section 92C(2), referencing cases such as *Development Consultants (P.) Ltd. v. Dy. CIT* and *Sony India (P.) Ltd. v. Dy. CIT*. The Departmental Representative contended that the proviso applied only when more than one price was determined by the most appropriate method, which was not the case here. However, the Tribunal, referencing section 92C and relevant case law, concluded that the arm's length price determined by a single method could be considered the arithmetical mean. Since the difference between the AO's adjustment and the assessee's declared price did not exceed 5%, no further adjustments were warranted. Thus, the Tribunal deleted the addition of Rs. 12,57,885.

3. Compliance with Transfer Pricing Documentation Requirements under Section 92D:
The AO noted that the assessee had not maintained the required transfer pricing documentation as mandated by section 92D, read with rule 10D of the Income-tax Rules. The assessee admitted to not undertaking a transfer pricing study. However, the Tribunal's decision focused on the applicability of the 5% margin proviso, implying that the lack of documentation did not affect the final determination of the arm's length price in this specific context.

Conclusion:
The Tribunal allowed the appeal partly by deleting the addition of Rs. 12,57,885 based on the proviso to section 92C(2), which provides a 5% margin benefit to the assessee. Other grounds raised in the appeal were dismissed for want of prosecution.