2016 (1) TMI 637 - AT - Income Tax

Appeal success: Transfer pricing ALP method clarified for coal imports

The Assistant Commissioner of Income-tax, Company Ci rcle-1 (3), Chennai Versus M/s. Coastal Energy Pvt. Ltd.

The Assistant Commissioner of Income-tax, Company Ci rcle-1 (3), Chennai Versus M/s. Coastal Energy Pvt. Ltd. - TMI Issues:1. Adjustment of Arm's Length Price in transfer pricing regulations.Analysis:Issue 1: Adjustment of Arm's Length PriceThe case involved an appeal by the Revenue against the Commissioner of Income-tax(Appeals) order regarding the deletion of an addition of Rs. 30,07,072 towards the adjustment of Arm's Length Price (ALP). The assessee imported coal from different countries and supplied it in India, leading to price variations due to quality and other factors. The Assessing Officer considered the Transfer Pricing (TP) adjustment due to price variation for more than five transactions. The CIT(Appeals) accepted the assessee's contention that the TP adjustment should be determined by the arithmetical mean of all shipments, not just from South Africa. The CIT(Appeals) held that the variation was within the acceptable range and deleted the addition. However, the Revenue contended that the transactions were not closely linked, and the price variation exceeded 5%, justifying the ALP adjustment. The Tribunal agreed with the Revenue, citing previous judgments that ALP should be determined on a transaction-by-transaction basis, and the proviso to sec.92C did not apply as only one price was determined. Therefore, the Revenue's appeal was allowed, and the addition was upheld.This judgment highlights the importance of accurately determining the Arm's Length Price in transfer pricing regulations, considering factors such as price variation, closely linked transactions, and the application of the arithmetical mean. It also emphasizes the need for consistency in applying transfer pricing methods and adhering to legislative provisions to prevent tax erosion through price manipulation.