2009 (12) TMI 675

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....argin method. The Margin is the income earned from Head Office. During the period relevant to the assessment year under consideration, the assessee has shown total turnover of Rs. 2,51,57,706 and other income of Rs. 150. The net profit earned from these activities was claimed as exempt under section 10B of the Act. Exemption under section 10B was also allowed. The Assessing Officer noted that the international transaction carried out by the assessee was with its associated enterprises. The assessee was asked to justify that the transaction was at an arm's length. The assessee replied that the assessee is supporting the activities of UK Head Office. The assessee being branch office is invoicing in UK at cost plus margin method. The margin is 10 per cent. No transfer pricing study has been undertaken. The Head Office in U.K. is suffering huge losses. The Assessing Officer noted that wherein international transactions exceeds Rs. 1 crore, the assessee was required to maintain all the records as per section 92D, read with rule 10D of the Income-tax Rules. Since the assessee has not maintained any record which has been admitted by the assessee itself and the fact remains that the transf....

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....od; (d)profit split method; (e)transactional net margin method; (f)such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed: [Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices : Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price. (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- (a)the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b)any information and document relating to an international transa....

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....s in the initial years of implementation of Transfer Pricing Regulations in India. The proviso, on the other hand, is a permanent provision. It is intended to provide safe harbour to marginal cases falling within the range. However, it is a settled law that when a provision is introduced, the Courts have to look at the language in which the provision is expressed. Only in cases of ambiguity, it is permitted to go beyond the language and consider the intention of the legislation. We would, therefore, like to concentrate on the language of the proviso in question. 163.1 On dissection of proviso, we find that it consists mainly of two parts (limbs) :- (a)Where more than one price is determined by the Most Appropriate Method, then Arm's Length Price shall be taken to be the arithmetical mean of such price; OR (b)At the option of the taxpayer, a price which may vary from the arithmetical mean by an amount not exceeding 5 per cent of such arithmetical mean. 163.2 As far as the first limb of above provision is concerned, the same has general application. Where, through the Most Appropriate Method, more than one price is determined, the arithmetic mean of such price shall be....

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....per cent of arithmetic mean. The decision of the Co-ordinate Bench is binding on us and we are inclined to follow the same. That apart, we are of the view that Kolkata Bench of the Tribunal has taken a right view of the provision. We are to go by the language of the provision and when we do so, we do not see anything in the language to restrict the application of the provision only to marginal cases where price disclosed by the taxpayer does not exceed 5 per cent of the arithmetic mean. In our considered opinion, the Arm's Length Price determined on application of Most Appropriate Method is only an approximation and is not a scientific evaluation. Therefore, the Legislature thought it proper to allow marginal benefit to cases who opt for such benefit. In the case of a taxpayer who exercises the option and accepts Arm's Length Price as per the second limb of the proviso or in other words, he accepts the Arm's Length Price even exceeding 5 per cent of Arithmetic mean determined by the tax authority as correct and is ready to pay tax on the difference between price disclosed by him and the above Arm's Length Price. We do not see any valid objection on the part of the revenue to the ap....