2011 (5) TMI 669 - AT - Income Tax

Transfer pricing - Once the transactions involved are international transactions within the meaning of section 92B(1) of the Act, the Transfer Pricing Provisions have rightly been involved - In view of the clear provisions of sections 92B(1) and section 92(1), there is no requirement to prove any motive to shift profits outside India or to evade taxes in India in the related party transactions

Issues Involved:
1. Applicability of Transfer Pricing Provisions.
2. Determination of Arm's Length Price (ALP).
3. Nature of Transactions (Cross Border vs. Domestic).
4. Motive to Shift Profits or Evade Taxes.

Issue-wise Detailed Analysis:

1. Applicability of Transfer Pricing Provisions:
The department appealed against the deletion of an addition of Rs. 2,78,76,273 made by the Assessing Officer (AO) based on the Transfer Pricing Officer's (TPO) determination of the Arm's Length Price (ALP). The CIT(A) had ruled that the transactions between the assessee company and its non-resident Associate Enterprises (AE) were not covered under the Transfer Pricing provisions as they originated and took place within India. The Tribunal, however, disagreed with the CIT(A), holding that the transactions involved were international transactions within the meaning of section 92B(1) of the Income Tax Act, as they were between a resident and a non-resident AE. Consequently, the transfer pricing provisions were applicable.

2. Determination of Arm's Length Price (ALP):
The TPO had directed the AO to reduce the purchase prices paid by the assessee to its AE by Rs. 91,37,476 for the Health Equipment Segment and Rs. 1,87,38,797 for the Food Supplements Segment, totaling Rs. 2,78,76,273. The AO accordingly revised the total purchases of the assessee. The CIT(A) deleted this adjustment, but the Tribunal reinstated it, emphasizing that once the transactions are classified as international transactions, the income arising must be computed at ALP as mandated by section 92(1) of the Act.

3. Nature of Transactions (Cross Border vs. Domestic):
The CIT(A) had observed that since the transactions between the assessee and its AE took place within India, they were not cross border transactions and thus not subject to transfer pricing provisions. The Tribunal refuted this, clarifying that the nature of the transaction being international, as per section 92B(1), does not require it to be cross border. The involvement of a non-resident AE suffices to invoke transfer pricing provisions.

4. Motive to Shift Profits or Evade Taxes:
The CIT(A) had also noted the absence of any motive to shift profits outside India or evade taxes. The Tribunal found this observation irrelevant, stating that the application of transfer pricing provisions does not depend on the motive but on the nature of the transaction as defined under section 92B(1). The Tribunal emphasized that the provisions are automatically triggered for international transactions, irrespective of any profit-shifting intent.

Conclusion:
The Tribunal concluded that the CIT(A) erred in holding that the transfer pricing provisions were not applicable. The Tribunal reinstated the AO's adjustments based on the TPO's determination of the ALP, thereby allowing the department's appeal. The Tribunal's decision underscores that the presence of an international transaction, as defined by section 92B(1), mandates the application of transfer pricing provisions, regardless of whether the transactions are cross border or whether there is a motive to shift profits or evade taxes.

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