B.PARAMESWARAN BHARATHAN vs. COMMISSIONER OF INCOME TAX

The assessee is a proprietary concern engaged in purchase of raw cashew nuts from abroad and export of processed cashew kernels. This appeal pertains to the assessment year 2003-04. The Assessing Officer (for short “AO”) had made an addition of Rs.23,72,129/- vide Annexure B under Section 92C(4) of the Income Tax Act, 1961 (for short “the Act”) as income from international transactions based on the decision of the Transfer Pricing Officer (TPO) under Section 92CA(3) dated 16.03.2006 at Annexure A, wherein Arm's Length Price (ALP) was fixed by the TPO. The appeal before the Commissioner

The following substantial questions of law arise for consideration: “i) Whether on the facts and circumstances of the case the Hon'ble Tribunal was justified in sustaining the order of the lower authorities for addition of Rs.23,72,139/- under Section 92C(4) as income on international transactions ? ii) Whether on the facts and circumstances of the case the Hon'ble Tribunal was justified in sustaining the order of the assessing - 4 - officer making addition of Rs.23,72,129/- merely picking up some of those transactions which were in favour of the revenue?”

The Tribunal found that the comparison made by the TPO of the commodities involved in similar purchases from other non-associated enterprises, was at variance to the prices at which the appellant had purchased the raw-materials. It is then found that the difference was more than 5%, and therefore, the objection of the assessee regarding fixation of ALP is not sustainable.

We heard the learned Senior Counsel, Government of India (Taxes) and the learned Counsel for the appellant.

The contention raised by the assessee that there was an embargo in referring the issue to the TPO for reason of the Instructions issued by the CBDT was dealt with elaborately, both by the first appellate authority and the Tribunal. Instruction No.3 of the CBDT dated 20.05.2003 required references to the TPO, if the value of international transaction exceeded Rs.5 crores. There is, however, no prohibition insofar as - 5 - the reference being made even when valuation is lower. In the present case, the reference was made with the approval of the Commissioner of Income Tax. We do not find any reason to interfere with the said findings of the lower authorities.

The main objection of the assessee is in the TPO having picked up certain transactions for the purpose of fixing ALP. The assessee had produced the tables showing the prices of imports and exports with the Associated Enterprises as also with unconnected enterprises. The assessee's contention was that in certain cases the import price of the transaction with the Associated Enterprises was lower than that with the unconnected enterprises. The TPO, however, took only those transactions where the import price with the Associated Enterprises was higher. We cannot but observe that there was no warrant for the TPO to interfere with the valuation of the transactions; where the assessee had shown lower valuation for imports from the Associated Enterprises, since those were the admitted price of the assessee itself. 9. In those instances where there was a higher valuation shown in the imports from the Associated Enterprises, the ALP was fixed by the AO finding that there was a difference of more than 5% with the valuation of transactions with unconnected enterprises. As has been contended by the assessee, the very intention of fixation of ALP is to ensure that by mere manipulation of prices ie: showing higher prices for imports and lower for exports, the actual profit in a transaction shall not be suppressed. Thus resulting in tax being avoided on the income generated in a transaction with an Associated Enterprise; the benefit of which will flow back to the assessee itself. The exercise undertaken by the TPO, according to us, was perfectly in tandem with the intention of the Legislature. There can be no ground taken that there was a pick and choose adopted by the AO. The ALP had to be fixed only with respect to those instances of imports, where the valuation was higher when the transaction was with an Associated Enterprise than a similar transaction with unconnected enterprise. In the light of the above, the questions of law raised are answered in favour of the Revenue and against the assessee and the appeal would stand rejected, leaving the parties to suffer their costs. K.VINOD CHANDRAN JUDGE ASHOK MENON dkr JUDGE - 8 -