No Transfer Pricing adjustment if the exempt income is lower than the income determined in accordance with ALP

In a recent decision of the Ahmedabad Bench of the Income-tax Appellate Tribunal, in the case of Motif India Infotech Private Limited, the Tribunal has ruled that no transfer pricing adjustment is required to be made to the exempt income since the exempt income declared is lesser than the income determined in accordance with the arm’s length principle. The Tribunal based its ruling on the premise that there is no erosion of the tax base and hence, no adjustment is necessitated.

The Tribunal also held that where the international transactions entered into by a taxpayer give rise to an exempt income, the provisions contained in the Indian Transfer Pricing Regulations would need to be applied to ensure that the profits claimed as exempt by the taxpayer are not in excess of the profit determined in accordance with the arm’s length price.

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