S. 92C: Transactions which are not closely linked cannot be aggregated for determining ALP

ITW India Limited vs. ACIT (ITAT Delhi)

Feb 2, 2015

The assessee’s adoption of combined TNMM on an entity level in respect of six separate sets of distinct international transactions – Purchase of raw material, Purchase of plant & machinery, Commission expenses, Sale of finished goods, Commission income and Reimbursement of expenses – is not capable of acceptance. Section 92(1) provides that : ‘Any income arising from an international transaction shall be computed having regard to the arm’s length price.’ The mandate of this section is to determine the ALP of ‘an’ international transaction. The term ‘transaction’ has been defined under rule 10A(d) to mean ‘a number of closely linked transactions’. It follows that the ALP of more than one transaction can be determined as one unit, only if they are closely linked transactions. In such a case, the plural of international transactions shall be considered as a singular for the purposes of benchmarking as a single transaction. Reverting to the facts of the instant case, we find that all the six sets of international transactions undertaken by the assessee can, by no standard, be considered as ‘closely linked’.

(ii) As the assessee has no mechanism to determine the ALP of this international transaction under the TNMM in a separate manner and the further fact that the comparable uncontrolled data under the CUP method is available, we feel no difficulty in holding that the CUP is the most appropriate method for this transaction.

iii) No side can be allowed cherry-picking. The best course in our considered opinion is to average the prices charged by the assessee from its non-AEs in the same quarter and then make its comparison with the price charged from the AE. When we consider the mandate of section 92C in conjunction with that of rule 10B, it transpires that if there is a single comparable uncontrolled transaction, then the price in such transaction is to be considered but if there are number of such comparable uncontrolled transactions, then the arithmetic mean of such prices charged or paid should be identified. Neither the Revenue can pick a single highest price from a number of comparable uncontrolled transactions, nor the assessee can argue for taking the lowest of such comparable uncontrolled transactions. It, therefore, follows that the average of the prices charged by the assessee from its non-AEs in the same quarter should be considered for identifying the benchmark price of the same product sold to AE in the same quarter.

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