2011 (6) TMI 124 - AT - Income Tax

Arm s length price - TNMM method - Addition - The law requires the associated enterprises to maintain such documents and information relating to international transactions as may be prescribed - if the amended proviso is taken into consideration then safe harbour of 5 per cent will be reckoned from the price received/paid by an assessee to/from its associate enterprise whereas if the case of the assessee will fall under the pre-amended proviso then safe harbour will be reckoned from the arm s length price determined by the TPO in a case where more than one price is determined by him by the most appropriate method - It is difficult to accept the argument of ld. DR that retrospective or prospective applicability of a provision should be decided in a way which has been explained by CBDT - The arithmetical mean in the present case is 15.64 per cent and by adopting the same the arm s length price has been determined at Rs. 15, 08, 43, 128 - The 5 per cent difference of arm s length price determined by the TPO comes to Rs. 75, 42, 156 and if the same is included in the revenue shown to be received by the assessee the total will come to Rs. 15, 08, 75, 869 which is in excess of arm s length price determined by the TPO - The 5 per cent difference of arm s length price determined by the TPO comes to Rs. 75, 42, 156 and if the same is included in the revenue shown to be received by the assessee the total will come to Rs. 15, 08, 75, 869 which is in excess of arm s length price determined by the TPO - Decided in the favour of assessee

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions.
2. Application of the safe harbour provision under section 92C(2) of the Income-tax Act.
3. Retrospective applicability of the amended proviso to section 92C(2).

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for international transactions:
The assessee, a subsidiary of Policy Networks Inc., USA, engaged in developing and exporting application software, entered into international transactions amounting to Rs. 14,33,33,713. The Transfer Pricing Officer (TPO) determined the ALP at Rs. 15,08,43,128, resulting in an addition of Rs. 75,09,415 to the assessee's income. The TPO applied additional filters, rejecting all comparables except three companies (SoftPro Systems, Fortune Informatics Limited, and Sankhya Infotech) and arrived at an OP/TC percentage of 15.64%.

2. Application of the safe harbour provision under section 92C(2) of the Income-tax Act:
The assessee argued that the addition was not warranted as the difference fell within the safe harbour limit of +/-5% as per the proviso to section 92C(2). The assessee's calculation showed the difference did not exceed 5%, thus qualifying for the safe harbour protection. The assessee cited various decisions supporting the application of the safe harbour provision.

3. Retrospective applicability of the amended proviso to section 92C(2):
The Revenue contended that the safe harbour should be computed on the revenue shown by the assessee and that the amended proviso, applicable from 1-10-2009, should be applied retrospectively. The assessee argued that the proviso was a substantive provision and could not be applied retrospectively. The Tribunal examined the pre and post-amendment changes, noting that the amended proviso created new rights and liabilities and thus could not be applied retrospectively. The Tribunal relied on established principles of interpretation and previous decisions, concluding that the unamended proviso applied to the assessee's case.

Conclusion:
The Tribunal held that the difference in the arm's length price determined by the TPO and the revenue received by the assessee did not exceed the safe harbour limit of +/-5% as per the unamended proviso. Consequently, the addition of Rs. 75,09,415 was deleted. The Tribunal did not address other issues raised by the assessee, as the deletion of the addition rendered them academic. The appeal filed by the assessee was allowed.