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Income Tax Appellate Tribunal, MUMBAI BENCHES “K”, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI ASHWANI TANEJA
O R D E R Per SHRI ASHWANI TANEJA (ACCOUNTANT MEMBER)
This appeal has been filed by the revenue against the order of ld.CIT(A) dated 22-12-2010 passed against the assessment order u/s 143(3) dated 14- 03-2005 for Assessment Year 2002-03. The solitary issue raised by the revenue in its appeal is – whether the assessee can be allowed to have benefit of suo
The brief facts and history of this case are that the assessee company, during the year, was engaged in of distribution of cardio vascular products in India. In the transfer pricing study report, the assessee adopted the Transctional Net Margin Method (TNMM) to determine the arm’s length price (ALP) of the international transactions relating to its distribution business and selected operating profit to sales OP / Sales) as the Profit Level Indicator. The arithmetic mean was determined to be 3.76%. As against this OP / Sales of the assessee company worked out at 13.79%. As the OP / Sales of the assessee was significantly lesser than the arithmetic mean of OP / Sales of the comparable companies as mentioned above, the assessee exercised the option of 5% range available under the proviso to Section 92C (2) of the Act. On the basis of the arithmetic mean of OP/Sales of comparable companies of 3.76% the arm's length price of the import of finished goods worked out to Rs.122,936,901 as against the transaction value of Rs.16,63,27,110. Upon exercise of the 5% range option available under the proviso to Section 92C(2), the arm's length price for import of finished goods from associated enterprises was determined to be in the range of Rs.11,67,90,056 to Rs.12,90,83,746. Accordingly, the amount of Rs. 3,72,43,364, being the amount of transaction value in excess of the arm’s length price determined under the provisions of Section 92C(2) [i.e. Rs.1,66,327,110 less Rs.12,90,83,746] was offered by the assessee as a suo moto adjustment in its income tax return for the assessment year 2002-03.
During the assessment proceedings the TPO asked the assessee to show as to why an adjustment to the extent of the difference between the transaction value and the arm’s length price determined based on the arithmetic mean of OP/Sales of comparables companies of 3.76% should not be made, as the transaction value falls beyond the + / - 5% range. The TPO was of the opinion that the benefit of the 5% range is allowed only if the price paid by the assessee falls within the 5% range of the arithmetic mean of the arm’s length price, and once it breaches that range, no such benefit is to be allowed. In response to the show cause notice, the assessee relied on the relevant provisions of the Circular No. 8 and stated that the benefit of the 5% range is available irrespective of whether the transaction value falls within the 5% range of arithmetic mean of the arm's length price or outside the same. Based on such an interpretation, the TPO proceeded to make an adjustment for Rs. 61,46,845 in respect of the international transaction of import of finished goods vide order dated February 18, 2005, being the difference between Rs. 12,90,83,746 and the arm's length price based on the arithmetic mean i.e. Rs.1,22,936,901. The Ld. AO upheld the above conclusions of the TPO, and confirmed the adjustments proposed by the TPO, while framing the assessment order under section 143(3) of the Act. Being aggrieved, the assessee contested this issue before ld.CIT(A) wherein assessee was given relief by the ld.CIT(A) after considering the amendment made vide Finance Act, 2009.
Being aggrieved, the department has filed appeal before us. Both the parties made their respective submissions before us. The ld.DR submitted that this issue was covered against the assessee because of subsequent amendment made under the law by way of inserting sub section (2A) to section 92C by Finance Act, 2012 with retrospective effect from 01-04-2002 and also relied upon the judgment of Hon’ble Special Bench in the case of IHG IT Services (India) Pvt Ltd vs ITO ITA No.5890/Del/2010 for Assessment Year 2006-07 order dated 30-04-2013.
It is noted that the law has been amended on this issue by way of insertion of sub-section (2A) to section 92C w.e.f. 01-04-2002 providing as under:-
Where the first proviso to sub-section (2) as it stood before its amendment by the Finance (No.2) Act, 2009 (33 of 2009), is applicable in respect of an international transaction for an assessment year and the variation between the arithmetical mean referred to in the said proviso and the price at which such transaction has actually been undertaken exceeds five per cent of the arithmetical mean, then, the assessee shall not be entitled to exercise the option as referred to in the said proviso.
It is thus clear from the perusal of above that the legal position is very clear that in case difference between the ALP and the actual value of the transaction exceeds 5%, then the assessee is not entitled to exercise the option as was available to it in the pre-amended provision existing at the time of filing of return by the assessee. Moreover, Hon’ble Special Bench in the case of IHG IT Services (India) Pvt Ltd (supra) has also decided this issue against the assessee holding as under:
Coming back to the provisions of the Income-tax Act, we are of the opinion that after the retrospective amendment to the second proviso to Section 92C(2) by the Finance Act, 2012, there remains no ambiguity that the 4 5 benefit of tolerance margin is available only when the variation between the arm's length price as determined under Section 92C(1) and the price at which the international transaction has actually been undertaken does not exceed the tolerance margin. Once it exceeds the tolerance margin, no benefit under the proviso would be available to the assessee and the ALP as determined under Section 92C(1) shall be considered. The question referred to the Special Bench is answered accordingly, i.e., in favour of the Revenue and against the assessee.
Thus, in view of the above we find that adjustment made by the Assessing Officer / TPO was correct as per law and facts and, therefore, action of ld.CIT(A) in deleting the addition was contrary to law. Therefore, the addition made by the TPO / Assessing Officer is upheld. The ground raised by the revenue is allowed.
As a result, appeal of the revenue is allowed. Order pronounced in the open court on the date of hearing.