2016 (11) TMI 946 - AT - Income Tax

Transfer pricing adjustment - MAM selection - adoption of written down value as the arm s length price under the comparable uncontrolled price method - Held that - When the price was determined by comparing the uncontrolled transaction, the difference between the price paid by the assessee and the price so determined in a comparable uncontrolled transaction has to be worked out and the difference between the two shall be taken as the arm s length price. Unfortunately, the Transfer Pricing Officer has not taken any pain either to identify the comparable transaction or to identify the price paid by the third party company in the uncontrolled transaction. The Transfer Pricing Officer has simply compared the written down value of the machinery. As rightly submitted by the assessee, depreciation is provided for all machineries used for production of an article or thing and other capital asset under the Income-tax Act. In view of the specific provision in rule 10B(1)(a) of the Income-tax Rules, the written down value cannot be a determining factor to decide the arm s length price. The value of the machinery has to be compared with identified transaction in the uncontrolled market. Since such an exercise was not done by the Transfer Pricing Officer, this Tribunal is of the considered opinion that the Dispute Resolution Panel has rightly found that the sale price between the two parties cannot be merely on the basis of the written down value. Therefore, the Dispute Resolution Panel has rightly found that adopting the written down value as the arm s length price under the comparable uncontrolled price method is not justified. Hence, this Tribunal do not find any reason to interfere with the order of the lower authority. Accordingly, the same is confirmed. - Decided in favour of assessee.

Summary

Issues:
1. Dispute over arm's length price determination for machinery purchased in an international transaction.
2. Application of the comparable uncontrolled price method.
3. Interpretation of rule 10B of the Income-tax Rules, 1962.

Analysis:
1. The appeal involved a disagreement regarding the arm's length price of machinery purchased by a subsidiary company from its holding company in an international transaction. The Transfer Pricing Officer compared the purchased machinery's value with the written down value of the parent company to determine the arm's length price. The Dispute Resolution Panel disagreed with this approach, leading to the appeal.

2. The Departmental Representative argued that the written down value should be the arm's length price due to recognized depreciation rates. In contrast, the representative for the assessee contended that the comparable uncontrolled price method should be applied, emphasizing the need to compare the purchased machinery with similar transactions in the uncontrolled market. The Dispute Resolution Panel supported the assessee's objection, rejecting the adjustment made by the Transfer Pricing Officer.

3. The Tribunal analyzed rule 10B of the Income-tax Rules, 1962, which outlines the method for determining arm's length price. It emphasized the necessity of identifying comparable transactions in the uncontrolled market for accurate price comparison. The Tribunal concluded that the written down value alone cannot determine the arm's length price and upheld the Dispute Resolution Panel's decision, dismissing the Revenue's appeal.

In summary, the judgment revolved around the correct application of the comparable uncontrolled price method and the interpretation of rule 10B in determining the arm's length price for machinery purchased in an international transaction. The Tribunal emphasized the importance of comparing transactions in the uncontrolled market and rejected the sole reliance on the written down value for pricing decisions.