2013 (12) TMI 780 - AT - Income Tax

Determination of arm s length price (ALP) - rate of commission charged by the assessee from its AEs - Held that - As the law provides for considering the price charged or paid in a comparable uncontrolled transaction, there can be no scope for considering a quotation price in isolation which is not preceded with or succeeded by any actual transaction. - the bare quotation price cannot be accepted under the CUP method for the purposes of benchmarking. - Decided against the assessee. It is the assessee who has to substantiate that the price charged is at ALP and not vice versa. The assessee has to face the music if it fails to prove so. Such a burden can be discharged by positively demonstrating and proving with the help of some comparable cases that the price charged or paid in an international transaction is at ALP. If the assessee does not bring on record any comparable case to indicate that the price charged in another comparable uncontrolled transaction should be differed, then the price so charged or paid in the given comparable uncontrolled transaction has to be accepted as ALP. Assessee charged commission from SIMCO as well as some third party at 0.50 per DMT. Such rate, unless shown with the help of some other comparable case to be not applicable in respect of the other two international transactions because of different volume, cannot be ignored. - Decided against the assessee.

Summary

Issues:
Determining arm's length price (ALP) of international transactions.

Analysis:
The judgment by the Appellate Tribunal ITAT DELHI involved an appeal by the assessee against the determination of the arm's length price (ALP) of certain international transactions for the assessment year 2006-07. The primary issue was the addition made by the Assessing Officer due to transfer pricing adjustment, totaling Rs.2,87,72,311, as the ALP was determined at Rs.4,14,53,877 compared to the declared value of Rs.1,58,12,470. The assessee benchmarked the transactions using the Comparable Uncontrolled Price (CUP) method. The dispute arose regarding the rates of commission charged in different transactions with associated enterprises (AEs) compared to an independent third party. The Tribunal examined the validity of using a quotation to benchmark international transactions under the CUP method.

The Tribunal analyzed the legal provisions under Section 92 and 92C of the Income-tax Act, emphasizing the requirement to compute income from international transactions at the arm's length price. The ALP determination under the CUP method involves identifying the price charged or paid in a comparable uncontrolled transaction, adjusting for differences, and considering it as the ALP for the services provided. The judgment referred to the Special Bench decision in the LG Electronics case, highlighting the procedural requirements for determining ALP under different methods.

The Tribunal scrutinized the argument presented by the assessee regarding the quotation provided by Jyoti Enterprises, Orissa, to substantiate the ALP. It was observed that the quotation alone, without evidence of actual transactions or comparable cases, could not be accepted as the price charged or paid in a comparable uncontrolled transaction. The Tribunal emphasized the burden on the assessee to prove the ALP under transfer pricing provisions and the necessity to provide evidence from comparable cases to support claims of pricing adjustments.

Ultimately, the Tribunal dismissed the appeal, upholding the addition made by the authorities based on the rate of commission charged in the transactions with associated enterprises. The judgment underscored the importance of substantiating pricing claims with concrete evidence from comparable cases to meet the requirements of transfer pricing regulations.

In conclusion, the Tribunal's decision emphasized adherence to procedural requirements and the burden of proof on the assessee in demonstrating that international transactions are conducted at arm's length prices. The judgment highlighted the significance of providing concrete evidence from comparable cases to support pricing adjustments under transfer pricing regulations.