2016 (3) TMI 216 - AT - Income Tax

Transfer pricing adjustment - determining ALP - whether hypothetical price which would have been charged under comparable uncontrolled conditions can be taken into account for computing the arm s length price? - Held that - In this view of the matter, it would indeed seem that a bonafide quotation, as referred to and relied upon by the assessee in this case- and particularly bearing in mind limited scale of operations of the assessee and the smallness of amount involved, could indeed be a valid input under the residuary method set out in rule 10AB read with rule 10B(1)(a). In our considered view, in the light of insertion rule 10AB, the rigour of rule 10B(1)(a) stands relaxed to the extent that not only the actual price of transactions under comparable uncontrolled conditions but also hypothetical price which would have been charged under comparable uncontrolled conditions can be taken into account for computing the arm s length price. The Assessing Officer was thus in error not only in resorting to an unscientific and unrecognized method ascertaining the arm s length price of the services rendered by the assessee but also in rejecting bonafide quotations as a valid input for ascertaining the arm s length price by the assessee. In view of the above we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned arm s length price addition - Decided in favour of assessee

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Justification of the arm's length price (ALP) adjustment of Rs. 12,71,378.
3. Validity of using quotations for benchmarking ALP under the Comparable Uncontrolled Price (CUP) method.

Detailed Analysis:

1. Condonation of Delay:
The appeal was filed with a delay of 7 days. The assessee submitted a condonation petition supported by an affidavit. After reviewing the petition and hearing the Departmental Representative, the Tribunal decided to condone the delay and proceed to decide the matter on merits.

2. Justification of ALP Adjustment:
The primary issue was whether the CIT(A) was justified in upholding the ALP adjustment of Rs. 12,71,378. The assessee provided ship management services to its parent company and received a monthly fee of US $40,000. The assessee benchmarked this fee using the CUP method, relying on quotations from Orient Express and Herald Maritime Services Pvt Ltd. The Assessing Officer (AO) rejected these quotations, stating they were not based on actual transactions and recalculated the revenue based on the number of crew members, leading to an ALP adjustment.

The Tribunal observed that the AO did not use any recognized method for determining the ALP and instead used an ad-hoc basis for the adjustment. The AO's computation of fees based on the number of crew members was not legally sustainable. The Tribunal emphasized that the determination of ALP must be based on a legally recognized method, which was not followed by the AO in this case.

3. Validity of Using Quotations for Benchmarking ALP:
The AO rejected the quotations provided by the assessee on the grounds that they were not based on actual transactions. However, the Tribunal noted that under Rule 10B(1)(a) read with Rule 10AB, hypothetical prices can be considered for determining ALP. The Tribunal referred to the case of Toll Global India Forwarding Pvt Ltd Vs DCIT, where it was held that Rule 10AB, which allows hypothetical prices, is retrospective in effect. The Tribunal concluded that bonafide quotations could be valid inputs under the residuary method set out in Rule 10AB, especially considering the limited scale of operations and the smallness of the amount involved.

Conclusion:
The Tribunal upheld the assessee's grievance and directed the AO to delete the ALP adjustment of Rs. 12,71,378. The decision was based on the peculiar facts of the case and the nature of the business of the assessee. The Tribunal clarified that this decision should not be considered as a general precedent for accepting bonafide quotations as valid inputs for determining ALP without further verification. The appeal was allowed, and the decision was pronounced in the open court on 29th February 2016.