IHGITServices(India)Pvt.Ltd.v.ITO(SB) (Delhi(Delhi) (Trib.)

S.92C:Avoidance of tax-Transfer pricing: Scope of +/- 5% tolerance adjustment to ALP

explained.

The Special Bench was constituted to consider whether prior to the insertion of the second proviso to s.

92C(2), the benefit of 5% tolerance margin as prescribed under proviso to s. 92C(2) for the purposes of

determining the arm’s length price of an international transaction is allowable as a standard deduction in

all cases, or is allowable only if the difference is less than 5%. In the meanwhile the second proviso to s.

92C(2) was amended by the Finance Act, 2012 with retrospective effect from 1.4.2002. The assessee

claimed, relying on Piagio Vehicle P. Ltd. vs. DCIT that even after the retrospective amendment by the

Finance Act, 2012, it was entitled to the benefit of adjustment of +/- 5% variation while computing the

ALP. It was also argued that the amendment was unconstitutional. HELD by the Special Bench:

There was a controversy on whether +/- 5% tolerance adjustment was a standard deduction or not.

After the retrospective amendment to the second proviso to s. 92C by the Finance Act, 2012 with

retrospective effect from 1.4.2002, it is evident that if the variation between the arm’s length price and

the price at which international transaction was actually undertaken does not exceed the specified

percentage, then only the price at which the international transaction has actually been undertaken shall

be deemed to be arm’s length price. Thus, the benefit of tolerance margin would be available only if the

variation is within the tolerance margin. Once the variation exceeded the tolerance margin, then there

would be no benefit even up to tolerance margin. Then, the ALP as worked out under s. 92C(1) shall be

taken as ALP without any benefit of tolerance margin. The view taken in Piagio Vehicle was without

considering the amendment and is per incuriam and not good law. The challenge to the constitutional

validity of the retrospective amendment cannot be made before the Tribunal as it is a creation of the Act

and not a constitutional authority. (A. Y. 2006-07)