INCOME TAX ACT, 1961
Transfer pricing - Computation of ALP -Basis of selecting comparables
Assessee had undertaken international transactions with its overseas associated enterprises (AEs) and charged price from its at Arms Length Price (ALP), determined by applying Transactional Net Margin Method (TNMM) taking operating profit upon sales as profit level indicator. AO accepted assessee determination of ALP. Subsequently, CIT viewed that assessment made was erroneous and thereupon he, under section 263, stated that issue of determination of ALP was not referred to Transfer Pricing Officer as required by Instruction No. 3 of 2003, dated 20-5-2003 of CBDT; and Transactional Net Margin Method (TNMM) was used by assessee taking Operating Profit upon Sales as Profit Level Indicator, therefore approach of assessee was not in consonance with rule 10B(2) and rule 10B(3). Held: In pursuant of facts it was found that even though there was good and reliable evidence for taking assessee as a tested party for comparison with Indian companies, foreign companies with different market conditions and economic realties were taken for comparison to apply transfer pricing regulations. Since, reference to Transfer Pricing Officer (TPO) under Instruction No. 3/2003, dated 20-5-2003 was mandatory in nature. In determination of ALP, specific characteristics of transaction, of property transferred or services provided were required to be look as a first step and, thereafter, functions performed, assets utilized or risk assumed (FAR) would have to be considered. In respect of tested party, reliable data for comparison was easily and readily available and fewest adjustments in computations were needed; it may be local or foreign entity and generally least of complex controlled taxpayer should be taken as a tested party, but where comparable or almost comparable, controlled and uncontrolled transactions or entities were available, it may not be right to eliminate them from consideration because they look to be complex; if taxpayer wishes to take foreign associated enterprise (AE) as a tested party, then it must ensure that it is such an entity for which relevant data for comparison was available in public domain or was furnished to tax administration. Hence, there was patent lack of application of mind by AO in fulfilling requirement of transfer pricing regulations and, therefore, CIT impugned order by invoking section 263 was justified.
Income-tax Act, 1961, Section 92C, Circulars and instructions :Instruction No. 3 of 2003, dated 20-5-2003.
A.Y. : 2004-05
Decision: In favour of revenue.
Case Law Analysis:Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/ 109 Taxman 66 (SC) (para 6), CIT v. Gabriel India Ltd. [1993] 203 ITR 108/ 71 Taxman 585 (Bom.) (para 6), CIT v. Sakthi Charities [2000] 244 ITR 226/ 110 Taxman 451 (Mad.) (para 6), Fattechand Rajmal Jain v. IAC [1997] 60 ITD 47 (Pune) (para 8), Sony India (P.) Ltd. v. CBDT [2007] 288 ITR 52/[2006] 157 Taxman 125 (Delhi) (para 15), Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Delhi) (para 16), Jagdish Kumar Gulati v. CIT [2004] 269 ITR 71/ 139 Taxman 369 (All.) (para16), Duggal & Co. v. CIT [1996] 220 ITR 456/[1994] 77 Taxman 331 (Delhi) (para 16), K.A. Ramaswami Chettiar v. CIT [1996] 220 ITR 657/ 88 Taxman 526 (Mad.) (para 16), Aztec Software & Technology Services Ltd. v. Asstt. CIT [2007] 294 ITR (AT) 32/ 107 ITD 141/15 SOT 49/162 Taxman 19 (Bang.) (SB) (para 25), Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT [2007] 109 ITD 101 (Delhi) (para 30), DIT (International Taxation) v. Morgan Stanley & Co. Inc. [2007] 292 ITR 416/ 162 Taxman 165 (SC) (para 30), Messing v. Commissioner [1967] 48 TC 502 (US) (para 57), Estate of Hall v. Commissioner [1989] 92 TC 312 (US) (para 57) and CIT v. Max India Ltd. [2008] 166 Taxman 188 (SC) (para 63).