Case Law Details
M/s J.J.Spectrum Silk Ltd. Vs. DCIT (ITAT Kolkata)
The assessee is not entitled to adjustment of 5 per cent as stipulated u/s 92C(2), where only one of the several methods specified u/s 92C(1) is applied by the assessee to determine the arm’s length price
Executive Summary :- The Kolkata Bench ‘B’ of the Income Tax Appellate Tribunal (the “Tribunal”), on 19 November 2010, pronounced its ruling in the case of M/s J J Spectrum Silk Ltd Vs DCIT, Kolkata, ITA No. 625/Kol/2009 , on whether the Taxpayer is entitled to the adjustment of 5 per cent as stipulated u/s 92C(2) of the Income Tax Act, 1961 (the “Act”), where a single arm’s length price has been determined by the Taxpayer by applying only one of the several methods specified u/s 92C(1) of the Act.
The Tribunal ruled in favor of the CIT (A) stating that where the arm’s length price has been determined by applying only one out of the several methods specified u/s 92C(1) of the Act, the assessee is not entitled for deduction of 5 per cent variation from the arm’s length price as stipulated u/s 92C(2) of the Act. In delivering the order, the Tribunal followed the ruling pronounced by ITAT (Delhi Bench) in the case of Perot Systems TSI (India) Ltd., and distinguished the case on hand from the Sony (India) Pvt. Ltd. vs DCIT case (ITAT, Delhi) and also did not find merit in relying on the CBDT Circular No. 12 dated 23 August 2001.
Facts
During the assessment year 2005-06, the Taxpayer sold fabrics worth INR 66,101,237 to its associated enterprise, M/s Spin International Inc., incorporated in the U.S., and relied on the Comparable Uncontrolled Price Method (“CUP Method”) to justify the arm’s length nature of such transaction. Upon examination of the Form 3CEB submitted by the Taxpayer, the Assessing Office (“AO”) found that in respect of two qualities of materials, the items were sold to the associated enterprise at much lower price compared to the price charged in comparable uncontrolled transactions entered into by the Taxpayer.
In view of above, the AO treated the differential amount of INR 173,103 as profit transferred by the Taxpayer to its associated enterprise and added the said difference to the income of the Taxpayer u/s 92 of the Act.
Being aggrieved, the Taxpayer filed an appeal before the CIT (A). The CIT (A) observed that, in respect of the other two transactions where adjustment was made by the AO, the difference between the price charged to the associated enterprise and the price charged to the third parties under the CUP method was substantial, being 11.05 per cent and 6.48 per cent. The CIT (A) also observed that the Taxpayer had failed to demonstrate that commodities sold to unrelated parties in these two instances were in any way different from those sold to the associated enterprise. On the contrary, the chart submitted by the Taxpayer suggested that the items were in fact the same, and even the names given appeared to be generic rather than those relating to exclusive/unique products. Accordingly, the CIT (A) confirmed the order of the AO.
In appeal before the Tribunal, the Taxpayer argued that the difference in prices as considered by the AO was of 6 per cent and 8 percent in respect of the two items and should be ignored. The Taxpayer made reference to the CBDT Circular No. 12 dated 23 August 2001, arguing that the CBDT has directed the AO not to make any adjustment to the arm’s length price determined by the assessee, if such prices were up to 5 per cent less or up to 5 per cent more than the prices determined by the AO. In light of the ruling pronounced in the case of Sony (India) Pvt. Ltd. vs DCIT (ITAT, Delhi), the Taxpayer also argued that, even otherwise, u/s 92C of the Act, the assessee should be given the
benefit of 5 per cent of the difference in prices and only the balance amount should be considered by applying the method for determination of arm’s length price.
Ruling of the Tribunal
The salient aspects of the Tribunal’s order are as follows:-
• The Tribunal found merit in the contentions of the CIT (A) that since the Taxpayer had adopted only one out of the several methods specified u/s 92C(1) of the Act for determining the arm’s length price (i.e. the CUP method), the Taxpayer was not entitled for deduction of 5 per cent variation from the arm’s length price.
• The Tribunal held that the decision of the ITAT (Delhi Bench) in the case of Perot Systems TSI (India) Ltd. squarely applies to the issue at hand and that the ruling pronounced by the same Bench in the case of Sony (India) Pvt. Ltd. vs DCIT does not apply to the facts of the case of the Taxpayer.
• The Tribunal also observed that the CBDT Circular dated 23 August 2001, does not apply to the case on hand as the price variation is more than 5 per cent. The Tribunal held that the said circular is applicable only if the variation in price with the associated enterprise, vis-à-vis the unrelated party is within the limit of plus minus 5 per cent.
Conclusion
The ruling though has laid stress on the fact that application of a single method does not entitle the assessee for deduction of 5 per cent variation from the arm’s length price , it has at the same time relied on the case of Perot Systems TSI (India) Ltd. vs. DCIT (New Delhi Tribunal), which affirms that if only one price is determined by the assessee while applying any of the specified method then the assessee shall not be entitled for deduction of 5 per cent variation from the arm’s length price as stipulated u/s 92C(2) of the Act. Hence in essence, section 92C (2) of the Act specifies that the adjustment of 5% is not applicable if a single price is determined by the assessee.
It may be noted that the Tribunal pronounced the ruling based on the interpretation of Section 92C of the Act. Section 92C of the Act (as amended by the Finance Act of 2008, and as applicable in this instance) provides “….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 assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean.”
Section 92C of the Act (as amended by the Finance Act of 2010) provides “….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.”
Fudgin Obvious, the counsel had no mind