2010 (11) TMI 839 - AT - Income Tax

Tribunal adjusts ALP for international transactions, allows appeal partly for verification.

SMCC Construction India Ltd. Versus Additional Commissioner of Income-tax, Range-9

The Tribunal directed the Assessing Officer to adjust the Arm's Length Price (ALP) only concerning the international transactions with associated ... TP Adjustment - Computation of arm’s length price - failure to allow the appellant an option for the downward variation of 5 percent in determining the arm’s length price - HELD THAT:- The facts stated in the assessment order are very clear. The Assessing Officer is taking the entire turnover while computing the arm’s length price whereas the international transactions of the assessee constitute only 9.71 per cent of the total transactions. The matter being clear from the record itself, it is not considered proper to restore this issue to the file of CIT (A). The case of the assessee is well supported by the decision of Coordinate Bench in the case of IL JIN ELECTRONICS (I) (P.) LTD. VERSUS ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-11(1), NEW DELHI [2009 (11) TMI 669 - ITAT DELHI], where it was held that the Assessing Officer directed to modify the assessment and make the adjustment only to the extent of difference in the arm’s length operating profit with adjusted profit with reference to the 45.51 per cent of the turnover, and not to the total turnover of the assessee. - Applying the said ratio, the Assessing Officer are directed to modify the assessment and make the adjustment only to the extent of difference in arm’s length price operating profit with adjusted profit with reference to 9.71 per cent of the turnover and not to the total turnover of the assessee. Grant of 5 per cent profit - HELD THAT:- The issue is also supported by the aforementioned decisions relied upon by ld. AR. Therefore, the Assessing Officer are directed to give the said adjustment also to the assessee. We direct the Assessing Officer to go through the figures shown in the chart and if the chart prepared by the assessee is in accordance with the aforementioned directions, then, the Assessing Officer will compute the arm’s length price as per the aforementioned chart and give proper relief to the assessee - The appeal filed by the assessee is partly allowed for statistical purposes. Issues Involved:1. Adjustment to the arm's length price (ALP).2. Application of the proviso to section 92C of the Income Tax Act.3. Consideration of total transactions versus international transactions with associated enterprises (AEs).Issue-wise Detailed Analysis:1. Adjustment to the Arm's Length Price (ALP):The primary issue in this appeal is the addition of Rs. 1,04,26,928 made by the Assessing Officer (AO) on account of adjustment to the ALP. The assessee, an engineering and construction company, had entered into various international transactions. The AO computed the operating profit/operating income at 4.17% and determined the arm's length margin at 5.30% after considering an adjustment of 1% for working capital requirements. The difference of Rs. 1,04,26,908 was thus added to the assessee's income.The assessee argued that the AO erroneously considered the entire turnover instead of only the international transactions with AEs, which constituted 9.71% of the total turnover. The Tribunal, referring to the decision in IL Jin Electronics (I) (P.) Ltd. v. Asstt. CIT, agreed with the assessee's contention that adjustments should be made only concerning the value of international transactions with AEs.2. Application of the Proviso to Section 92C of the Income Tax Act:The assessee contended that the CIT(A) erred in not applying the proviso to section 92C, which allows for a downward variation of 5% in determining the ALP. The Tribunal noted that the proviso provides a standard deduction of 5% to the taxpayer, subject to the taxpayer's option. This position was supported by decisions in Philips Software Centre (P.) Ltd. v. Asstt. CIT and Skoda Auto India (P.) Ltd. v. Asstt. CIT, which upheld the taxpayer's right to this adjustment.3. Consideration of Total Transactions versus International Transactions with AEs:The Tribunal found that the AO's computation of the ALP based on the entire turnover was incorrect, as the international transactions with AEs were only a small fraction of the total turnover. The Tribunal directed the AO to make adjustments only to the extent of the international transactions with AEs, in line with the precedent set by IL Jin Electronics (I) (P.) Ltd.Conclusion:The Tribunal directed the AO to:1. Adjust the ALP only concerning the international transactions with AEs, which constituted 9.71% of the total turnover.2. Apply the 5% standard deduction as per the proviso to section 92C.3. Recompute the ALP based on the revised calculations provided by the assessee.The appeal was partly allowed for statistical purposes, with the AO instructed to verify and apply the correct adjustments as per the Tribunal's directions.