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TMI Blog2011 (1) TMI 108X X X X Extracts X X X X X X X X Extracts X X X X ..... in the business of production and sale of iron ore pellets. For the assessment year 2004-05, the return of income was filed by the assessee on01/11/2004declaring Nil income, after setting off of carried forward losses. 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. While computing the book profit as per the provisions of sec.115JB of the Act, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in brief. During the year under consideration the assessee company sold iron ore pellets to M/s STEMCOR (S.E.A) PTE Ltd,Singaporein pursuance of the agreement dated12-06-2003entered with that company. M/s STEMCOR is an Associated Enterprise. The assessee admitted sales amount at Rs.66,08,35,225/- in respect of the said sale transactions. The assessee had also sold similar items to "Non Associated Enterprises" (NAE) located inHong KongandSwitzerland. The A.O referred the matter to Transfer Pricing Officer (TPO)Hyderabadfor determination of Arm's Length Price (ALP) in respect of these sales transactions. 5.1 Sec. 92C of the Act, read with the rules made there under, prescribes various methods for determination of ALP. The most appropriate method of determination of ALP is selected from amongst such methods so prescribed in the Act and Rules. In the instant case, both the parties have adopted "Comparable uncontrolled price method" (called CUP method) for determination of ALP. 5.2 The TPO, vide his order dated21-12-2006, determined the ALP at Rs.67.20 crores by comparing the ratio of "Net Profit/Cost" in the transactions entered with AE and NAE. The NP/Cost ratio was 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvations of the learned CIT (A) are extracted below: "As per the copy of the auditor's report u/s 92E in Form No.3CEB filed along with the return of income, it is noted that the appellant company adopted CUP method as the prices of the product that was manufactured by the appellant company were not stable and kept on changing with the international market. The TPO also while determining the ALP accepted the CUP method adopted by the appellant company. Therefore, there was only one price. In this context, reliance was placed upon the Circular No.12 of CBDT dated23/08/2001wherein it was stated that where the price determined by the appellant is within the range of +/ - 5% of the price determined by the TPO no adjustment to the ALP should be made. The TPO rejected the said contention in view of the amendment brought about to the proviso to section 92C(2) which according to the Assessing Officer overrides the Circular dated23/08/2001. However, this view of the TPO prima facie appears to be incorrect. Vide circularNo.8 of 2002 dated27/08/2002, the explanatory notes on provisions relating to direct taxes introduced by Finance Act, 2002 were given. The said circular clearly states that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar no.12 has been brought into the statute by Finance Act 2002 w.e.f. 1.4.2002 by amending the proviso to sec. 92C(2) and hence the said circular can no longer have application after the said amendment. According to the amended proviso, the concession of 5% shall be available only if arithmetical mean is required to be taken in view of determination of more than one price under most appropriate method. In the instant case, since the TPO has worked out only one price, the question of allowing concession does not arise. In this regard, the learned DR relied upon the following case law: a) Perot Systems TSI (India) Ltd. Vs. D.C.I.T (130 TTJ 685 (Delhi)) b) Global Vantedge (P) Ltd. Vs. D.C.I.T (37 SOT 1 (Delhi)) (1 ITR (Trib) 326) 8. On the other hand, the learned AR heavily placed reliance on the Circular No.12 issued by CBDT (supra), and submitted that the CBDT has considered the practical situation while implementing the new provisions in initial years, since there may be room for different interpretations in implementing the new legislation and accordingly granted concession of +/- 5%. The learned AR also submitted that there is an arithmetical error in computation of arm' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed u/s 92C(1). (b) As per Rule 10C(1), the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction, and which provides the most reliable measure of an arm's length price in relation to the international transaction. (c) The "Most appropriate method" shall be selected having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe. The various factors have been prescribed under Rule 10C(2). (d) The most appropriate method so selected shall be applied for determination of ALP. (e) However, if more than one price is determined by the most appropriate method then the ALP shall be (i) taken to be the arithmetic mean of such prices or (ii) at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five percent of such arithmetical mean. 12. The assessee places reliance on the circular no.12 dated 23.8.2001 issued by CBDT explaining the provisions governing transfer price in an internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , vide its circular no.14/2001 dated 12.12.2001 (2001) (252 ITR (St.) 65), explained the scope and effect of new provisions. The relevant paragraph dealing with the proviso cited above reads as under: "Applying the most appropriate method to different sets of comparable data can possibly result in computation of more than one arm's length price. With a view to avoid unnecessary disputes, the proviso to section 92C(2) provides that in such a case the arithmetic mean of the prices shall be adopted as the arm's length price. In the normal course, if the different sets of comparable data are equally reliable there may not be any significant divergence between the various arm's length prices determined." Thus it can be seen that under the proviso to sec. 92C(2) as inserted by the Finance Act, 2001, only arithmetical mean of the prices has to be taken and the statute did not provide for any concession. Hence, considering the practical difficulties, it appears that the CBDT has issued circular no.12 dated 23.8.2001, which was relied upon by the assessee, in order to give concession of +/- 5%. Though the CBDT has explained the amendments brought out by Finance Act, 2001 in a subseq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplaining certain provisions, which never came into operation. The CBDT derives its power to issue the circulars from sec. 119 of the Act. The observations made by Hon'ble Supreme Court in this regard in the case of Union of India Vs. Azadi Bachao Andolan (2003) (263 ITR 706 (S.C)) has been judicially noticed in the case of the decision of Hon'ble jurisdictional A.P. High Court's decision in the case of CIT Vs. Raajendra Prasad (299 ITR 227 (AP)) as under: "Reliance has also been placed by Mr. Swamy on the judgment reported in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC). While dealing with the powers of the Central Board of Direct Taxes, the Supreme Court, in this judgment, considered the effect of circular under section 119 of the Act and was of the view (page 727): "Section 119, strategically placed in Chapter XIII which deals with "income-tax authorities" is an enabling power of the Central Board of Direct Taxes, which is recognised as an authority under the Income tax Act under section 116(a). The Central Board of Direct Taxes under this section is empowered to issue such orders, instructions and directions to other income-tax authorities 'as it may deem fit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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