Transfer pricing

Arm’s Length Principle — Giant companies cannot be used as comparables in the case of a pygmy company, as held by HydTrib in DCIT v Deloitte Consulting India Pvt — In favour of: The assessee (partly); ITA No 1082/Hyd/2010: (AY 2004–2005).

It is mandatory to use the current year data first for determining the ALP, and if any circumstances reveal an influence on the determination of the ALP in relation to the transaction being compared, then other data for a period not more than two years prior to such financial year may be used.

The +/−5% tolerance band provided under s 92C is not to be taken as a standard deduction.

No two comparable companies can be replicas of each other and r 10B has to be applied not with technical rigour, but on a broader prospective.

Several factors such as market risks, environmental risks, entrepreneurial risks and functional risks, etc, affect this matter and ultimately affect the results of the company, and such factors make it impracticable to any authority to find out the exact duplicate company of the assessee as a comparable.

The existence of actual cross border transactions or the motive to shift profits outside India or to evade taxes is not a precondition for transfer pricing provisions to apply.

During a transfer pricing assessment, the lower authorities are not required to demonstrate the motive of the assessee-company to shift the profits outside India by manipulating the prices.

Interest under s 234B and 234C — Charging of interest under s 234B and 234C is mandatory and merely consequential in nature to the assessed income.

Penalty under s 271(1)(c) — There is no provision in the Act for allowing the appeal against the initiation of penalty proceedings under s 271(1)(c).

Deduction under s 10A — Telecommunication charges incurred by the assessee-company, which has been excluded by the AO from the export turnover, has to be excluded from the total turnover also, if such amount stands included therein, while computing the admissible deduction under s 10A.

The assessee’s appeal is partly allowed and the revenue’s appeal is dismissed.

Decided on: 22 July 2011.