INCOME TAX ACT, 1961

Section 92C

Transfer pricing - Determination of ALP - Tested party, i.e., assessee seeking - Adjustments on account of differences in customs duty--Denial on the ground that adjustment could be made only in case of comparables

Assessee entered into transactions with AE abroad, i.e., import of watches and spares for resale and reimbursement of travel costs, communication costs, etc., TPO adopted foreign comparables based at Italy and Europe to benchmark said transactions. Assessee pleaded that high cost of importing goods into India had to be adjusted for, since foreign comparables operating in Italy enjoyed benefit of NIL or negligible customs duty and did not have to spend same proportion of import duty cost as assessee. TPO rejected this on the ground that any adjustment could only be made in case of comparables and not in case of tested party, i.e., assessee. Held: For certain types of adjustments, relevant data for comparables may either not be available in public domain or may not be reliably determinable based on information available in public domain, whereas, it may be possible to make equally reliable and accurate adjustments on the tested party whose data would generally be easily accessible. Rule 10B(3)(ii) provides for making 'reasonably accurate adjustments' for eliminating any material differences between the two transactions being compared. It is an undisputed fact that import of watches carried heavy customs duty which might not be there in so far as Italian companies were concerned. The purpose or intent of comparability analysis is to examine as to whether or not, the values stated for international transactions are at ALP. Regulations do not restrict or provide that adjustments cannot be made on the results of tested party. There is no specific provision in rule 10B(1)(e)(iii) which would impede adjustment of profit margin of tested party. Net profit margin of the tested party drawn from its financial accounts can be suitably adjusted to facilitate its comparison with other uncontrolled entities/transactions as per sub-clause (i) of rule 10B(1)(e). Thus, difference on account of custom duty paid by assessee and that existing in the location where comparable companies operated, could not be ignored .Accordingly, adjustment on account of differences in customs duty could be duly made in case of tested party, i.e., assessee.

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