IN THE ITAT, DELHI BENCH ‘H’ : NEW DELHI

Sony India (P) Ltd. v. DCIT

ITA Nos. 1189/Del/2005,

819/Del/2007 & 820/Del/2007

September 23, 2008

RELEVANT EXTRACTS:

157.The taxpayer also claimed benefit of adjustment under proviso to Section 92C(2) which is as under:-

“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, or, at the option of the taxpayer, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean.”

158.The TPO did not allow any benefit in both the assessment years under appeal as in his view above provision was not applicable in this case.The provision would be applicable only if Arm’s Length Price shown by the taxpayer falls within ±5% of arithmetic mean of more than one price determined by the Most Appropriate Method.As the taxpayer was not falling in above range, it was not entitled to any benefit.

159.The taxpayer carried the matter in appeal before the ld. CIT(A).It was contended that proviso to Section 92C is to be read along with provision of Section 92C(4).The representative of the taxpayer also drew CIT(A)’s attention to notes on clauses of the Finance Bill 2002 wherein this provision has been explained.

159.1It was accordingly contended that the taxpayer has the option of charging a price to its associated enterprise which may vary from the arithmetic mean of uncontrolled price determined by the TPO by ±5%.Thus, adjustment to the income of the appellant should have been made after considering ± 5% variation from determined Arm’s Length Price.It was further submitted that it is mandatory for the TPO to calculate the Arm’s Length Price in the light of Sub-section (1) and sub-section (2) of Section 92C of the I.T.Act.

160.After considering facts and circumstances of the case, the ld. CIT(A) found no force in the submissions advanced on behalf of the taxpayer.He was of the view that there were two limbs of the provision.Its first limb deals with the situation where the Most Appropriate Method leads to more than one Arm’s Length Price and in that situation the Arm’s Length Price should be the arithmetic mean.Second limb of the provision, provides the facility of option to the taxpayer if price varies by an amount not exceeding ± 5% of such mean.Thus, according to the ld. CIT(A), the option is available to the taxpayer in the case where variation in price is only upto 5% as found through arithmetic mean.If the variation in price is more than 5%, the taxpayer has no option and Arm’s Length Price shall be determined as per the first limb of the proviso.The ld. CIT(A) referred to Circular No. 12 of CBDT dated 23.8.01 issued in the shape of press note by the Ministry of Finance (Deptt. Of Revenue), Government of India relating to the application of transfer pricing provisions.Circular was issued in order to avoid hardship to the taxpayers in the initial years of implementation of transfer pricing provisions introduced for the first time for AY 2002-03.The press note makes its intention clear for not making any adjustment if the price adopted by the taxpayer was upto 5% less or upto 5% more than the Arm’s Length Price determined by the AO.In effect, transfer pricing shown by the taxpayer was not disturbed if such price fell within the range of±5% of determined price.But if the variation in the disclosed price and the determined Arm’s Length Price was more than the above limit, then the Circular provided that transfer price declared by the taxpayer was not to be accepted and adjustment for the variation was required to be made.

161.The ld. CIT(A) further held that provision under review was like a safe harbour i.e. if one was within the harbour i.e. within 5% limit variation, such person was entitled to exercise the option.The ld. CIT(A) further observed that proviso under consideration was not a provision like any standard deduction to the taxpayer as to enable it to opt the 5% deduction everywhere.It was not possible to accept that in all Arm’s Length Price computations, the AO/TPO shall be required to reduce or increase the price/expenditure by 5% irrespective of the Arm’s Length Price shown and arithmetic mean of Arm’s Length Price determined by the AO, the CIT(A) further added.According to the ld. CIT(A), such a view cannot be accepted.Reliance was placed by the ld. CIT(A) on the decision taken by his predecessor in the case of Mentor Graphics(Noida) Pvt. Ltd. Vs DCITfor AY 2002-03 where similar claim was rejected.Turning to the facts involved in two assessment years under appeal, the ld. CIT(A) found that arithmetic mean of ALP determined by the TPO in both the assessment years exceeded range of ±5% from the international transaction shown in the books of account. The appellant was not entitled to any relief under the above proviso.The ld. CIT(A) accordingly upheld the action of the Assessing Officer.

162.The taxpayer being aggrieved has brought the issue in appeal before the Tribunal.During the course of hearing, ld. Representative of the taxpayer has made the following submissions:-

“(i)Circular 12/2001 states that “The Assessing Officer shall not make any adjustment to the arm’s length price determined by the taxpayer, if such price is upto 5% less or upto 5% more than the price determined by the Assessing Officer.In such cases the price declared by the taxpayer may be accepted.”Hence, the circular relied upon by the learned DR simply prescribes that relief should be given to taxpayer where the arm’s length price determined by the taxpayer and the AO do not differ by more than 5%.However, the Circular does not provide for the manner for determination of arm’s length price.

(ii)Moreover, the Circular was issued prior to insertion of the Proviso to Section 92(2).Hence, it would be incorrect to assume that the Circular explains the Proviso to Section 92(2).

(iii)If the Proviso was intended to be in the same spirit as the Circular, the latter should have been withdrawn after introduction of the proviso.

(iv)Moreover, the plain wording of the legislation “at the option of the taxpayer, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean” makes it amply clear that the taxpayer may exercise the option allowed under law and choose the price varying from the arithmetic mean by 5 per cent as the arm’s length price.

(v)It appears that the DR has interpreted the Proviso solely in light of the Circular without any regard to the wordings or the intent of the Proviso.”

162.1Reliance was placed on the decision of the ITAT Kolkata Bench in the case of Development Consultants Pvt. Ltd. Vs DCIT, Kolkata in ITA No. 79 & 80/KOL/08.

162.2The ld. DR, on the other hand, relied upon the reasoning given by the ld. CIT(A).The ld. DR has further made the following submissions in writing:-

“The adjusted mean ALP is taken as ALP by TPOs only in cases where the declared transfer price falls within + – range. Consequently, the transfer price shown by the taxpayers in such cases is accepted and no transfer pricing adjustment is made.

But, in cases where the declared transfer price falls outside +5% range, the main ALP is taken as ALP and consequently, transfer pricing adjustments are made by TPOs from the mean ALP and not from adjusted mean ALP.

The dispute over +5% adjustment in ALP determination is further explained by way of following example.

Table: Dispute over +5% Adjustment in ALP Determination

Item

Taxpayer’s View

TPO’s View

Declared Transfer Price

(Sale)

90

90

Mean ALP

100

100

+ – 5% Range

95-105

95-105

Adjusted Mean ALP (-5%)

95

95

ALP

95

95

TP Adjustment

05 (95-90)

10(100-90)

In the above example, the declared transfer price of 90 is outside ± 5% range of 95-105.Therefore, the TPO takes mean ALP of 100 as ALP and consequently, transfer pricing adjustment (10) is made for the difference between mean ALP and transfer price (90).However, the taxpayer takes adjusted mean ALP of 95 as ALP and contends that transfer pricing adjustment should be made for 05 on account of difference between adjusted mean ALP (95) and transfer price (90)!

In most of the transfer pricing audit cases, one of the dispute relates to ±5% adjustment in ALP determination.The main reason of dispute lies in divergent interpretations of the proviso to section 92C(2) of the Act which contains relevant provisions dealing with such adjustment.

In order to resolve the dispute, it may be necessary to make clarificatory amendment in the proviso which unambiguously expresses the legislative intent in respect of ±5% adjustment in ALP determination.

As would be seen from the discussion made hereinafter, the legislative intent for ±5% adjustment in ALP determination was to accept the declared transfer price if the variation between transfer price and the mean ALP was within ±5% of mean ALP.In case, the variation between the declared transfer price and the mean ALP exceeded ±5%of mean ALP, the transfer price was not to be accepted and transfer pricing adjustment was to be made from mean ALP i.e. for the difference between declared transfer price and mean ALP.

Section 92(1) of the Income Tax Act provides that any income arising from an international transaction shall be computed having regard to the arm’s length price.Section 92C(2) of the Act provides for determination of the arm’s length price by applying the most appropriate method in the prescribed manner.The proviso to the said Section 92C(2), as it stood originally before its amendment by the Finance Act, 2002, provided that where more than one price is determined by the most appropriate method, the arm’s length price shall be taken to be arithmetical mean of such prices.This would have resulted into addition to the total income on account of transfer pricing adjustments in all cases wherever there was any variation between the arithmetical mean arm’s length price (i.e. mean ALP) determined by the AO/TPO and the transfer price as shown by the taxpayers.

The transfer pricing provisions were brought on the Statute by the Finance Act, 2001 w.e.f. 01.04.2001.With a view to avoid hardship to the taxpayers in the initial years of implementation of these provisions, the Govt. of India, through a Press note issued by the Ministry of Finance (Department of Revenue) on 22.8.2001, expressed its intention of not making any adjustment if the price adopted by the taxpayer was upto 5% less or up to 5% more than the arm’s length price determined by the AO.Immediately thereafter, the Board issued the Circular No. 12 dated 23.8.2001 specifying that the AO shall not make any adjustment to the price shown by the taxpayer if such price was up to 5% less or up to 5% more than the arm’s length price determined by the AO and in such cases, the price declared by the taxpayer may be accepted.

In effect, the transfer price shown by the taxpayer was not to be disturbed if it was within + -5% mean ALP range i.e. upto 5% less (i.e. in case of receipts) or up to 5% more (i.e. in case of outgoings) than the arm’s length price determined by the AO based on the arithmetical mean of the prices.If the transfer price shown by the taxpayer was less than 5% (in case of receipts) or more than 5% (in case of outgoings) of the arithmetical mean arm’s length price (i.e. mean ALP) determined by the AO, then the transfer price declared by the taxpayer was not to be accepted and the adjustment was required to be made for the difference between the arm’s length price determined by the AO based on the arithmetical mean of the prices (i.e. mean ALP) and the transfer price shown by the taxpayer.

The relaxation in transfer pricing adjustments provided by the Board’s Circular No.12 dated 23.8.2001, referred to in the proceedings paragraph, was clearly intended to remove hardship to the taxpayers in whose cases the variation between the declared transfer price and the determined mean ALP was only marginal i.e. within ±5% of the mean ALP.This relaxation was not intended to be provided to the taxpayers in whose cases the variation between the declared transfer price and the determined mean ALP was substantial and exceeded the permissible +5% range.

Subsequently, the relaxation extended by the above Circular was, in substance, brought on the Statute by the Finance Act, 2002 by amending the proviso to section 92C(2) of the Act with retrospective effect from 01.04.2002 so as to provide that besides the arithmetical mean of the prices, the arm’s length price shall be a price which varies from the arithmetical mean up to ±5%.

It is, thus, evident that the legislative intent of the amended proviso to section 92C(2) of the Act is to remove hardship in cases of marginal variation up to ±5% between the transfer price declared by the taxpayer and the mean ALP determined by the TPO.This is sought to be achieved by taking the arithmetical mean price after adjustment of variation up to ±5% (i.e. adjusted mean ALP), as the arm’s length price so that in cases of marginal variation upto ±5%, there would be no difference between the transfer price declared by the taxpayer and the ALP determined by the TPO.Consequently, there would be no addition on account of transfer pricing adjustment in cases of marginal variation upto ±5% between the transfer price declared by the taxpayer and the mean ALP determined by the TPO.

The benefit of adopting the adjusted mean ALP as the arm’s length price is not intended to the available to a case where the variation between the transfer price shown by the taxpayer and the mean ALP determined by the TPO exceeds ±5% of mean ALP.In case, the variation between the transfer price declared by the taxpayer and the mean ALP determined by the TPO exceeds ±5% of mean ALP, then the arm’s length price shall be taken to be mean ALP and not the adjusted mean ALP.Consequently, the transfer p
ricing adjustment would be made for the difference between the transfer price shown by the taxpayer and the mean ALP determined by the TPO.

The view taken by TPO with regard to ±5% adjustment in ALP determination, as mentioned in preceding paragraphs is, thus, found to be in consonance with the legislative intent of the proviso to section 92C(2) of the Act.”

163. We have given careful thought to the rival submissions of the parties.We are of the view that Circular No. 12 dated 23.1.2001 does not help to solve the problem.The said Circular was issued prior to introduction of the proviso.It was meant to give benefit to the marginal cases 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.

163.1On dissection of proviso, we find that it consists mainly of two parts (limbs):-

(a)Where more than one price is determined by the Most AppropriateMethod, 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% of such arithmetical mean.

163.2As 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 taken to be the Arm’s Length Price in relation to the international transaction.As far as first limb of the provision is concerned, there is no option with nor any sort of concession allowed to the taxpayer.The Arm’s Length Price so determined may be accepted or contested by the taxpayer or by any aggrieved person in accordance with the statutory provisions.It is statutory levy without any option. There is no dispute as to the interpretation of the above part or limb of the provision.

163.3The controversy is relating to the second limb/portion of the provision where “an option” is given to the taxpayer to take Arm’s Length Price which may vary from the arithmetic mean by an amount not exceeding 5% of such arithmetic mean.Here again, there is no controversy that taxpayer can take Arm’s Length Price which is not exceeding 5% of the arithmetic mean.The “option”, as is clear from the language is to take Arm’s Length Price which is not in excess of 5% of the said mean.The word “option” as per The Law Lexicon is synonymous with “choice” or “preference”.Therefore, it is the choice of the taxpayer to take Arm’s Length Price with a marginal benefit and not the arithmetical mean determined as the Most Appropriate Method.The controversy is in cases where the International Price shown in related party transaction exceeds 5% of the Arithmetic mean envisaged by the provision and such Arm’s Length Price is contested by the taxpayer.According to the revenue, in such a situation, the second limb of the provision is not applicable.The reasons put forth in support of such a view by the revenue have already been noted.It is their contention that the second part/limb of the provision is meant to cover marginal cases only where the price shown by the taxpayer does not exceed 5% of the Arm’s Length price representing arithmetic mean by the Most Appropriate Method.Where the difference is much more than 5%, then taxpayer cannot have the benefit of the said provision, particularly where the taxpayer has not accepted such arithmetic mean.

163.4The other view is the one accepted by Kolkata ‘A’ Bench of the Tribunal in the case of Development Consultants (P) Ltd. Vs DCIT, Circle 2, Kolkata (ITA No.79 & 80/KOL/2008) decided on 4.4.2008.As per the said decision, the benefit of second limb of the proviso was allowed to the taxpayers although the price disclosed by it was more than 5% of arithmetic mean.The decision of the Coordinate 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% 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% 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 application of above provision to such a case. The taxpayer has exercised the option and took Arm’s Length Price as per the second limb as the final price without raising any dispute.Therefore, the parameters laid down as per the second limb are fully satisfied.In our opinion, the legal position cannot be different in a case where minor variation of 5% is not accepted and Arm’s Length price is further challenged in appeal.Mere fact of acceptance or non-acceptance of arithm
etic mean can be taken to be the determining factor relating to right to contest Arm’s Length Price in appeal.Such inference has no support of language of the provision.In our view, both in the first as also in the second limb, implications of determined Arm’s Length Price are the same except for the marginal benefit allowed to the taxpayer under the second limb.Hence, we are of the view that second limb is applicable even to cases where the taxpayer intends to challenge Arm’s Length Price taken as arithmetic mean and determined through the Most Appropriate Method.As stated above, the second proviso is intended to give marginal relief to all taxpayers as determination of Arm’s Length Price is not an exact science but is an approximation.Option is given to the taxpayer as in some cases, variation not exceeding 5% of arithmetic mean might not suit the taxpayer, and, therefore, taxpayer in such cases should not be put to a prejudice.Otherwise, there is no difference between the first and the second limb of the provision as far as right of the taxpayer to challenge the determined price is concerned.The second limb only allows marginal relief to the taxpayer at his option to take ALP not exceeding 5% of the arithmetic mean.Therefore, in line with the view taken by Kolkata Bench of the Tribunal, we are of the view that benefit of the second limb is available to all taxpayers irrespective of the fact that price of international transaction disclosed by them exceeds the margin provided in the provision..

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