2015 (11) TMI 269 - AT - Income Tax

Transfer pricing adjustment - leverage of 5% disallowed - whether assessee is entitled for the benefit of 5% tolerance margin for the purpose of determining the arm s length price of the international transaction as variation between the arm s length price computed by the Transfer Pricing Officer and price at which the international transaction has actually been undertaken which does not exceed 5% of the latter? - Held that - Second proviso to sec 92C(2) is to be read independently. The lower authorities instead of following above second proviso followed the first proviso. Being so, the Transfer Pricing Officer wrongly came to the conclusion that leverage of 5% is not allowable to the assessee s case where once price based on a particular method of arm s length price is not applicable. Accordingly, we are in complete agreement with the claim of the assessee with regard to benefit for the adjustment of 5% variation, while computing the arm s length price. This ground of the assessee is allowed. The transfer pricing officer is not justified in comparing with the average price published by the cashew bulletin of cashew export council with that of price mentioned in individual transaction for the products. Accordingly, we direct the TPO to compare the average monthly price to the product published in cashew bulletin with the average price charged by the assessee for its product and decide accordingly. - Decided in favour of assessee. Disallowance of interest - assessee has computed interest on all the import transactions at the Bank Rate of 12% on the credit term in excess of 30 day - Held that - The contention of the ld. Departmental Representative is that for importing cashews from its Associated Enterprises from Benin, the assessee paid more than the price mentioned in the CEPC Journal (External data), so the Assessing Officer made transfer price adjustment. The plea of the assessee is that the assessee availed 150 days credit for payment. Being so, the price was charged little more than the rate mentioned in the CEPC Journal (External data). If due credit is given to interest @12% for the credit period, there is no necessity for TP adjustment. This plea of the assessee is correct. In our opinion, due weightage is to be given towards interest benefit enjoyed by the assessee by availing credit for 150 days for payment and Rule 10B(1)(a)(ii) of the Income Tax Rules, 1962 also permits such benefit to the assessee. Hence, the lower authorities are not justified in making such adjustments. This ground is allowed.- Decided in favour of assessee.

Summary

Issues:
Transfer Pricing Adjustment - Arms Length Price Determination
Application of Second Proviso to Sec. 92C(2)
Interest Disallowance in Transfer Pricing Adjustment

Transfer Pricing Adjustment - Arms Length Price Determination:
The appeal was against the addition of C77,58,955 by the Assessing Officer towards adjustment in Arms Length Price, determined by the Transfer Pricing Officer (TPO). The TPO had determined the Arms Length Price of the Associated Enterprise purchase at C37,12,20,434 as opposed to C37,90,79,389 admitted by the assessee. The Commissioner of Income Tax (Appeals) upheld the addition made by the Assessing Officer based on the TPO's determination. The assessee contended that they were entitled to a + 5% tolerance margin for determining the arm's length price, as per the second proviso to Sec. 92C(2). The Tribunal agreed with the assessee, emphasizing that the second proviso should be read independently. The TPO's method of comparison was also questioned, and the Tribunal directed the TPO to compare the average monthly price to the product published in the cashew bulletin with the average price charged by the assessee for its product.

Application of Second Proviso to Sec. 92C(2):
The Tribunal found that the lower authorities had incorrectly followed the first proviso instead of the second proviso to Sec. 92C(2) in determining the arm's length price. The Tribunal agreed with the assessee's claim for the benefit of + 5% variation adjustment while computing the arm's length price. This decision was supported by a previous Special bench order.

Interest Disallowance in Transfer Pricing Adjustment:
The Tribunal considered the disallowance of interest amounting to C39,80,531 as part of the total difference of C77,58,955 determined by the TPO. The assessee argued that the interest should be adjusted from the prices at which the Associated Enterprise supplied the cashew. The Tribunal agreed with the assessee, emphasizing that the interest benefit enjoyed by the assessee by availing credit for 150 days should be considered. Rule 10B(1)(a)(ii) of the Income Tax Rules was cited to support the adjustment of interest from the purchase price. The Tribunal allowed this ground raised by the assessee, resulting in all grounds raised in the appeal being allowed.

In conclusion, the Tribunal allowed the appeal, emphasizing the correct application of the second proviso to Sec. 92C(2) for determining the arm's length price and considering the interest adjustment in the transfer pricing calculation. The Tribunal directed the Transfer Pricing Officer to reevaluate the comparison method and consider the interest benefit enjoyed by the assessee.