Transfer Pricing – Scope of +/- 5% tolerance adjustment to ALP explained

INCOME TAX APPELLATE TRIBUNAL

ITA No. 5890/Del/2010

Assessment Year: 2006- 07

M/s IHG IT Services (India) Vs. Income Tax Officer

ORDER

PER BENCH:

This Special Bench was originally constituted under Section 255(3) of the Income-tax Act, 1961 by the Honorable President, Income Tax Appellate Tribunal, vide order dated 16^th March, 2012, consisting of Shri G.E.Veerabhadrappa, President, Shri G.D.Agrawal, Vice President and Shri Rajpal Yadav, Judicial Member, inter alia, to consider and decide the following question:-

“Whether prior to insertion of second proviso to Section 92C(2), the benefit of 5% tolerance margin as prescribed under proviso to Section 92C(2) of the ITAct, 1961 for the purposes of determining the arm’s length price of an international transaction is allowable as a standard deduction in all cases, or is allowable only if the difference is less than 5%.”

2. However, the Special Bench has been reconstituted under Section 255(3) of the Income-tax Act, 1961 by the Honorable President, Income Tax Appellate Tribunal, vide order dated 22^nd February, 2013, consisting of Shri G.D.Agrawal, Vice President, Shri S.V.Mehrotra, Accountant Member and Shri Rajpal Yadav, Judicial Member to consider and decide the aforesaid question.

3. At the time of hearing before us, the learned counsel for the assessee fairly admitted that after the amendment by Finance Act, 2012 with retrospective effect from 1.4.2002, the question posed before the Special Bench appears to have been settled against the assessee. He, however, submitted that the Pune Bench of ITAT, vide order dated 23^rd July, 2012 in the case of Piagio Vehicle P.Ltd. Vs. DCIT in ITA No.1480/PN/2010, has taken the view that the assessee is entitled to benefit of adjustment of +1- 5% variation while computing the arm’s length price (ALP). That the above decision of ITAT is after coming into force the Finance Act, 2012, by which, second proviso to Section 92C of the Income-tax Act, 1961 has been modified with retrospective effect. He, therefore, submitted that in view of the above decision of Pune Bench, the assessee is entitled to benefit of 5% tolerance margin for the purpose of determining the arm’s length price of the international transaction. He further stated that even otherwise, the amendment made by the Finance Act, 2012 with retrospective effect from 1.4.2002 is constitutionally invalid. Therefore, the question posed before the Special Bench should be answered in affirmative, i.e., in favour of the assessee.4. The learned Departmental Representative, on the other hand, stated that the amendment made by the Finance Act, 2012 is constitutionally valid and the learned counsel for the assessee is not at all justified in claiming the same to be invalid. He further stated that the ITAT has no power to adjudicate upon the constitutional validity of any provisions of the Income-tax Act. With regard to the decision of ITAT Pune Bench cited supra, he stated that such decision has not considered the amendment by the Finance Act, 2012. Therefore, this decision is per incuriam because it failed to consider the provisions of the Income-tax Act, i.e., the amendment made by the Finance Act, 2012 to Section 92C(2) with retrospective effect. He, therefore, stated that the question before the Special Bench should be answered in favour of the Revenue i.e., the benefit of 5% tolerance margin is allowable only if the difference is less than 5%.