2016 (1) TMI 637 - AT - Income Tax

Arm's Length Price adjustments for multiple shipments require transaction-by-transaction analysis; proviso inapplicable if only one MAM price.

Determination of arm's length price requires assessment of each international transaction separately when transactions are not closely linked; ... Addition towards adjustment of Arm’s Length Price - as per AR arithmetical mean in respect of seven shipments should be arrived at determining the ALP and if it is variation is below 5%, there could not be any TP adjustment in view of sec.92(C) - Held that:- The seven sets of international transactions undertaken by the assessee cannot be considered as ‘closely linked’. We, therefore, refuse to accept the contention of the assessee’s counsel. Being so, we find that the judgment relied on by the ld. DR in the case of Development Consultants (P) Ltd. v. DCIT (2008 (4) TMI 340 - ITAT CALCUTTA-A) wherein it was held that the ALP should be determined on a transaction-by-transaction basis and not on an aggregate basis as argued by the assessee’s counsel. The same view was taken by the Tribunal in the case of ACIT v. UE Trade Corporation (India) (P.) Ltd.(2010 (12) TMI 224 - ITAT, NEWDELHI ) wherein it was held that the Assessing Officer was within his jurisdiction for the purpose of determining of ALP by examining each transaction separately. Further, in this case, price variation is more than 5%, Assessing Officer is justified in making adjustment of ALP determined by the tax payer and the proviso to sec.92C provides that where more than one price may be determined by the most appropriate method, the ALP shall be taken to be the arithmetical mean of such prices. In the instant case only one price has been determined under most appropriate method, the question of application of the proviso does not arise. Accordingly, the assessee is not entitled for concession as prescribed in the proviso to sec.92C(2) of the Act. - Decided in favour of revenue 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.