Transfer pricing applies despite section 10A exemption, but no adjustment was warranted on the facts.

Transfer pricing provisions under Chapter X can apply to international transactions even where the assessee's business income is exempt under section 10A, because the statutory purpose is to prevent understatement of income taxable in India. However, if the international transaction relates to income that is itself exempt in India, there is no underreporting of taxable income on that basis. On the stated facts, the assessee had not disclosed excess exempt income, so no arm's length adjustment was warranted and the returned income was accepted.

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Issues: Whether transfer pricing provisions could be applied to benchmark international transactions of an assessee whose business income was exempt under section 10A of the Income-tax Act, 1961.

Analysis: The Tribunal read section 92C(4) of the Income-tax Act, 1961 with the object of Chapter X as explained in CBDT Circular No. 14 of 2001. It held that transfer pricing provisions are meant to ensure that income taxable in India is not understated by manipulation of prices in international transactions, but the statute does not create an exception merely because the assessee claims exemption under section 10A. At the same time, where the international transaction yields income that is exempt in India, it cannot be said that the assessee has underreported taxable income in India. On that construction, the arm's length principle can operate to ensure that excess exempt income is not shown, but in the facts of the case the assessee had not disclosed excess exempt income and no adjustment was warranted.

Conclusion: Transfer pricing provisions were applicable in principle, but the proposed adjustment was not sustainable on the facts and the income returned by the assessee was to be accepted.

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