2013 (5) TMI 309 - AT - Income Tax

Allowability of benefit of tolerance margin - The matter in dispute relates to the question Whether prior to insertion of second proviso to Section 92C(2), the benefit of 5% tolerance margin as prescribed under proviso to Section 92C(2) of the IT Act, 1961 for the purposes of determining the arm s length price of an international transaction is allowable as a standard deduction in all cases, or is allowable only if the difference is less than 5%? Held that - After the retrospective amendment to the second proviso to Section 92C(2) by the Finance Act, 2012, the benefit of tolerance margin is available only when the variation between the arm s length price as determined under Section 92C(1) and the price at which the international transaction has actually been undertaken does not exceed the tolerance margin. Once it exceeds the tolerance margin, no benefit under the proviso would be available to the assessee and the ALP as determined under Section 92C(1) shall be considered. The question referred is answered accordingly, in favour of the Revenue and against the assessee. Assessee has also challenged the constitutional validity of retrospective amendment to second proviso to Section 92C(2). Held hat - Income Tax Appellate Tribunal is a creation of the Income-tax Act and not a constitutional authority. It has to interpret the provisions of the Income-tax Act as it stands. It cannot adjudicate upon constitutional validity or otherwise of any provision of the Income-tax Act.

Summary

Issues:
Interpretation of Section 92C(2) of the Income-tax Act, 1961 regarding the benefit of 5% tolerance margin for determining the arm's length price of international transactions.

Analysis:
The Special Bench was constituted to decide whether the 5% tolerance margin is allowable as a standard deduction in all cases or only if the difference is less than 5%. The amendment by Finance Act, 2012, with retrospective effect from 1.4.2002, modified the second proviso to Section 92C(2), affecting the interpretation of the tolerance margin benefit. The appellant argued for the benefit based on a decision by ITAT Pune Bench, while the Revenue contended that the amendment was valid, and the benefit should be limited to cases where the difference is within 5%.

The history of Section 92C(2) was reviewed, highlighting the changes brought by Finance Acts in 2009 and 2012. The amendment in 2009 restricted the benefit of the tolerance margin to cases with a variation within 5%. Contrary decisions by ITAT on this issue led to the constitution of the Special Bench. However, the subsequent retrospective amendment by Finance Act, 2012, clarified the conditions for the benefit of the tolerance margin.

The judgment analyzed the second proviso to Section 92C(2) post-amendment, emphasizing that the benefit of the tolerance margin is only applicable when the variation between arm's length price and actual transaction price does not exceed the specified percentage. If the variation surpasses the tolerance margin, the arm's length price as determined under Section 92C(1) would prevail without the benefit of the margin. The decision of ITAT Pune Bench, though post-Finance Act, 2012, was considered per incuriam as it did not account for the retrospective amendment.

The constitutional validity of the retrospective amendment was challenged by the appellant, but the Tribunal clarified its role in interpreting the Income-tax Act, not adjudicating on constitutional matters. Ultimately, the judgment favored the Revenue, stating that the benefit of the tolerance margin is only available within the specified limits, as per the amended provisions. The case was referred back to the Division Bench for further proceedings based on this decision.