2013 (9) TMI 595 - ITAT MUMBAI

Transfer pricing adjustments - ALP - uncontrolled transaction - Comparables relied on by the assessee differ in their risk and functional profile from that of the assessee and thus cannot be accepted as comparable – Held that:- What is an "uncontrolled transaction" has been clearly defined under rule 10A(a) to mean "a transaction between enterprises other than associated enterprises whether resident or non-resident". A plain reading of the meaning given to the expression "uncontrolled transaction" leaves no room for any doubt that it is a transaction between two non-associated enterprises. If the transaction is between two associated enterprises, it goes out of the ambit of "uncontrolled /transaction" under rule 10A. When section 92C is read along with rules 10B(e) and 10A, it becomes abundantly clear that in computing the arm's length price under the transactional net margin method, a comparison of the assessee's net profit margin from international transactions with its associate enterprises has necessarily to be made with that of the net profit margin realised by the same enterprise or an unrelated enterprise from a comparable but definitely uncontrolled transaction, i.e., a transaction between non-associated enterprises.

The arm's length price can be determined only by making comparison with a comparable uncontrolled transaction and not a comparable controlled transaction.

Internal comparable, being the subsidiary company of the assessee company, be taken as comparable for computing the ALP for an international transaction – Held that:- Arm's length price represents the true value of transaction or profitability as will be there in the ordinary course without having any regard to the relationship between the concerns - Arm's length price of the transaction or the arm's length profit cannot be considered as benchmark for the purposes of making comparison in other cases – Legislature restricted the ambit only to uncontrolled transactions for computing the arm's length price in respect of international transactions between two associate enterprises - The basic purpose behind the transfer pricing provisions is to ensure that the multinational companies do not arrange their intra group cross border transactions in such a way as to reduce the incidence of tax in India. A multinational company, having concerns across the world, may resort to pricing the intra group transactions in such a manner that lower income gets offered in countries with high tax rates and higher income gets reflected in countries with lower tax rates, so that its overall tax liability is shrinked.

Net profit margin realised from a transaction with an associate enterprise cannot be taken as a comparable being internal comparable for computation of the arm's length price of an international transaction with another associate enterprise even though the net margin from a transaction with associate enterprise is found and accepted at the arm's length price – Therefore, M/s. ICBC, a wholly owned subsidiary of the assessee are dismissed as comparable for computing price for international transaction.