Visakhapatnam ITAT: The +/-5% benefit is not applicable to Arms Length Pricing done on a single appropriate method

ACIT v. Essar Steel Ltd., on 25^th January, 2011

Assessment Year: 2004-05

Question/s before the Hon’ble Tribunal:

(1) Whether the benefit of proviso to section 92C(2) (relating to +/-5% adjustment) applies on a single price determination or only upon determination of arithmetic mean of two or more prices?

(2) Whether the Circular No.12 dated 23.8.2001 issued by the CBDT will have application for the year under consideration over the proviso to sec. 92C(2), as amended by the Finance Act 2002?

Relevant facts: During the year under consideration, the assessee had entered into two types of international transactions viz., Commission payments and Sales to its Associated Enterprise (AE) located abroad. The assessing officer referred the matter of determination of Arms Length Price (ALP) in respect of these International transactions to the Transfer Pricing Officer (TPO) in accordance with sec. 92CA of the Act. The TPO expressed the view that the Commission Payments do not require any adjustment. However, in respect of sales effected to the AE, the TPO determined the ALP of the sale transactions at Rs.67,20,03,342/- as against sales value of Rs.66,08,35,225/- declared by the assessee, thus resulting in a difference (enhancement) of Rs.1,11,68,115/-. The assessing officer accepted the ALP so determined by the TPO and accordingly added the difference cited above to the total income of the assessee (1.69% difference).

Upholding the appeal of the revenue, the Hon’ble Tribunal held that:

Para 9: “There appears to be no dispute with regard to the fact that the amended proviso to sec. 92C(2) shall have application only if more than one price is determined by the most appropriate method.”

Para 15: “It can be noticed that the Circular No.12 of 2001 was issued only to explain the amendments made by the Finance Act 2001, which never came into operation.”

Para 16: “Now the question that arises is whether an assessee could place his reliance on a circular issued for explaining certain provisions, which never came into operation…In the instant case, the proviso, for which the Circular no.12, (Supra) was issued, has never come into operation and hence the question of the administration of the said provo(sic) to sec. 92C(2) does not arise at all. In view of the subsequent amendment brought in by Finance Act, 2002, the said circular has become otiose. In view of the above, we are of the view that the assessee could not place reliance on the Circular no.12 and for the year under consideration, only the proviso to sec. 92C(2), as amended by Finance Act 2002 is applicable. In that case, the said proviso shall apply only if the “most appropriate method” results in more than one price, in which case the arithmetical mean of such prices shall be taken as the ALP. However, the assessee shall have an option to adopt a price which may vary from the arithmetical mean by an amount not exceeding five percent of such arithmetical mean.”

Para 16(sic): “In the instant case, only one price has been determined under “Most appropriate method”. Hence, in our view, the question of application of the proviso does not arise.”

The decision is available here.