TP Adjustments to be restricted to international transactions and cannot form the basis for rejecting books of accounts

Phoenix Mecano (India) Ltd Vs. DCIT (ITAT Mumbai)

ITA No. 7646/Mum/2011, Date- 23.12.2011

Issues- 1. Whether adjustment should be restricted only to the international transactions or can be extended to the entire turnover of the taxpayer? 2. Are the books of accounts liable to be rejected if there is a transfer pricing adjustment? 3. Prior to 1.10.2009, is the benefit of standard deduction of-+5% under the proviso to section 92C(2) of the Act available to the taxpayer?

Held –Placing reliance in the case of Star lite and various other decisions, the Tribunal held that the adjustments should be restricted only to the international transactions with the AEs and not to the entire turnover.Benefit of standard deduction of-+5% under the proviso to section 92C(2) of the Act be allowed to the taxpayer even in case where the difference in value of international transactions and its arm’s length price (‘ALP’) was more than 5% range. In relation to international transactions with the AE, there is provision for separate TP adjustments, and due to a mere existence of TP adjustment, entire books could not be rejected in the absence of any defects. The matter was restored back to the AO for fresh adjudication.

Conclusion – This ruling reiterated the existing positions that adjustments should be restricted only to the international transactions of the taxpayer as against the whole entity approach. Further, it also held that any transfer pricing adjustment should not automatically lead the tax authorities to reject the books of accounts unless specific defects are noted.