DCIT, Gurgaon V. M/s. Hi- Lex India Pvt. Ltd., Gurgaon

ITA 1849/DEL/2014

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6518 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 11 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-03-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 01-03-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 28-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B. RAMANJANEYULU
• Assessee Lawyers: VARUN KHANNA; RAJAN SACHDEV
• Keywords: Depreciation; Transfer pricing; International transaction; Set aside
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 92C; 271(1)(b); 139; 92; 92B; 10B; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-2 : NEW DELHI BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.2036/DEL/2014 ASSESSMENT YEAR : 2005-06 HI-LEX INDIA PRIVATE LIMITED, PLOT NO.55, SECTOR-3, IMT MANESAR, GURGAON. PAN: AABCM9648Q VS. ACIT, GURGAON CIRCLE, GURGAON. ITA NO.1849/DEL/2014 ASSESSMENT YEAR : 2005-06 ACIT, CIRCLE-2, GURGAON. VS. HI-LEX INDIA PRIVATE LIMITED, PLOT NO.55, SECTOR-3, IMT MANESAR, GURGAON. PAN: AABCM9648Q (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RAJAN SACHDEV, CA & SHRI VARUN KHANNA, CA DEPARTMENT BY : SHRI B. RAMANJANEYULU, SR. DR ITA NOS.2036 &1849/DEL/2014 2 DATE OF HEARING : 01.03.2017 DATE OF PRONOUNCEMENT : 03.03.2017 ORDER PER R.S. SYAL, AM: THESE TWO CROSS APPEALS ONE BY THE ASSESSEE AND THE OTHER BY THE REVENUE ARE DIRECTED AGAINST THE ORDER PASSED BY THE CIT(A) ON 16.01.2014 IN RELATION TO THE ASSESSMENT YEAR 2005- 06. 2. THE ONLY ISSUE RAISED BY THE ASSESSEE IN ITS APP EAL IS AGAINST NON- GRANTING OF TOLERANCE BAND OF +/(-) 5% FROM THE ARM S LENGTH PRICE (ALP) IN ACCORDANCE WITH THE PROVISO TO SECTION 92C (2). THE REVENUE IS AGGRIEVED AGAINST THE RELIEF ALLOWED IN THE FIRST A PPEAL. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS A 100% INDIAN SUBSIDIARY OF M/S NIPPON CABLE SYSTEMS INC., JAPAN. IT IS ENGAGED IN MANUFACTURING MECHANICAL CONTROL CABLES FOR TWO-WHEELER AND FOUR-WHEELER MAKERS. THE ASSESSEE FILED ITS RE TURN DECLARING NIL INCOME. CERTAIN INTERNATIONAL TRANSACTIONS WERE RE PORTED. THE ASSESSING OFFICER (AO) REFERRED THE MATTER OF DETER MINATION OF THE ARMS ITA NOS.2036 &1849/DEL/2014 3 LENGTH PRICE (ALP) OF THE REPORTED INTERNATIONAL TR ANSACTIONS TO THE TRANSFER PRICING OFFICER (TPO). THE TPO OBSERVED T HAT THE ASSESSEE DECLARED AN INTERNATIONAL TRANSACTION OF `PURCHASE OF RAW MATERIAL AND COMPONENTS WITH A TRANSACTED VALUE OF RS.5,77,65,8 70/- APART FROM `PURCHASE OF MACHINERY/SPARE ETC. WORTH RS.55,99,0 20/-. THERE WERE OTHER TWO INTERNATIONAL TRANSACTIONS OF REIMBURSEME NT OF TAX PAID AND OTHER EXPENSES, WHICH WERE NOT DISPUTED. THE ASSESS EE APPLIED TRANSACTIONAL NET MARGIN METHOD (TNMM) TO DEMONSTRA TE THAT ITS TWO INTERNATIONAL TRANSACTIONS OF `PURCHASE OF RAW MATE RIAL AND COMPONENTS AND `PURCHASE OF MACHINERY/SPARES ETC. WERE AT ALP . THE ASSESSEE SELECTED CERTAIN COMPARABLE COMPANIES WHICH WERE RE JECTED BY THE TPO AS FUNCTIONALLY DISSIMILAR. HE, THEN, SHORTLISTED T WO COMPANIES AS COMPARABLE, VIZ., M/S REMSONS INDUSTRIES LTD. AND S UPRAJIT ENGINEERING LTD., WITH AVERAGE PROFIT MARGIN OF 7.74%. THE TPO DETERMINED THE ALP OF `RAW MATERIAL PURCHASED FROM AE AT RS.4,65, 32,510/- AS AGAINST THE DECLARED VALUE OF RS.5,77,67,870/-. TH IS RESULTED INTO PROPOSING TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.1,12,33,360/-. THE AO MADE THE ABOVE ADDITION IN HIS ORDER DATED 2 7.11.2008. THE ITA NOS.2036 &1849/DEL/2014 4 ASSESSEE WENT IN APPEAL BEFORE THE LD. CIT(A), WHO, VIDE THE IMPUGNED ORDER, REDUCED THE TRANSFER PRICING ADJUSTMENT FROM RS.1.12 CRORE TO RS.23 LAC. BOTH THE SIDES ARE IN APPEAL AGAINST TH E VIEW TAKEN BY THE LD. CIT(A) AGAINST THEIR RESPECTIVE INTEREST. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. FIRSTLY, WE ESPOUSE THE GRIEVA NCE OF THE REVENUE. IT CAN BE SEEN THAT THE TPO DID NOT PROPOSE ANY TRANSF ER PRICING ADJUSTMENT FOR THE INTERNATIONAL TRANSACTION OF `PURCHASE OF M ACHINERY/STORES ETC.. HE PROPOSED TRANSFER PRICING ADJUSTMENT ONLY IN RES PECT OF THE INTERNATIONAL TRANSACTION OF `PURCHASE OF RAW MATER IAL AND COMPONENTS AMOUNTING TO RS.5,77,65,870, WHICH IS DISCERNIBLE F ROM HIS CALCULATION AS UNDER : - DETERMINATION OF ARMS LENGTH PRICE: OPERATING INCOME OF THE ASSESSEE 325,720,182 OPERATING PROFIT SHOWN @ 4.29% 1,39,77,382 OPERATING PROFIT @ 7.74% 2,52,10,742 DIFFERENCE BOOK VALUE OF RAW MATERIAL PURCHASED FROM AE 5,77 ,65,870 ALP OF RAW MATERIAL PURCHASED FROM AE 4,65,32,51 0 ITA NOS.2036 &1849/DEL/2014 5 5. IT CAN BE SEEN FROM THE ABOVE WORKING THAT TH E TPO STARTED WITH THE OPERATING INCOME OF THE ASSESSEE AT RS.32.57 CRORE, WHICH IS THE AMOUNT OF GROSS RECEIPTS AS PER THE ASSESSEES PROFIT & LO SS ACCOUNT, WHOSE RELEVANT PART HAS BEEN REPRODUCED AT PAGE 6 OF HIS ORDER. THEREAFTER, OPERATING PROFIT HAS BEEN TAKEN AT RS.1.39 CRORE IN THE WORKING, WHICH IS AGAIN A FIGURE PICKED UP FROM PAGE 6 OF THE HIS OWN ORDER. THESE TWO FIGURES ARE ENTITY LEVEL RESULTS OF `REVENUE AND ` OPERATING PROFIT. THE TPO APPLIED AVERAGE PROFIT RATE OF COMPARABLES OF 7 .74% TO THE AMOUNT OF THE REVENUE AT RS.32.57 CRORE FOR DETERMINING TH E OPERATING PROFIT FROM ALL THE TRANSACTIONS OF THE ASSESSEE AT RS.2.5 2 CRORE. DIFFERENCE BETWEEN THE OPERATING PROFIT OF THE ASSESSEE AT RS. 1.39 CRORE AT ENTITY LEVEL AND THE ARMS LENGTH PROFIT OF RS.2.52 CRORE HAS BEEN TAKEN AS THE AMOUNT OF ADJUSTMENT. IT IS THIS ADJUSTMENT THROUGH WHICH THE ALP OF THE `RAW MATERIAL PURCHASED FROM AE HAS BEEN COMPU TED AT RS.4.65 (RS.5.77 CRORE MINUS RS.1.12 CRORE). THUS, IT IS M ANIFEST THAT THE TPO COMPUTED THE TRANSFER PRICING ADJUSTMENT AT RS.1.12 CRORE WITH REFERENCE TO THE ENTITY LEVEL FIGURES OF THE ASSESSEE, WHICH INCLUDE NOT ONLY TRANSACTIONS OF IMPORT OF RAW MATERIAL FROM AES, BU T ALSO DOMESTIC ITA NOS.2036 &1849/DEL/2014 6 PURCHASE/IMPORT FROM NON-AES. THE LD. CIT(A), BY ME ANS OF HIS CALCULATION TABULATED BELOW, RESTRICTED THE AMOUNT OF ADDITION TO THE AE TRANSACTIONS, AGAINST WHICH THE REVENUE IS IN AP PEAL. 6. THE MOOT QUESTION IN THE REVENUES APPEAL IS IF A TRANSFER PRICING ADJUSTMENT CAN BE MADE IN RESPECT OF NON-AES TRANSA CTIONS? SECTION 92 IS A SUBSTANTIVE PROVISION IN THIS REGARD. SUB-SECT ION (1) OF SEC. 92 PROVIDES THAT ; `ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTI ON SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. THE TERM INTERNATIONAL TRANSACTION HAS BEEN DEFINED U/S 92 B TO MEAN: A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRI SES,.. A CONJOINT READING OF SECTION 92 WITH SECTION 92B CLE ARLY BRINGS OUT THAT COMPUTATION OF INCOME AT ALP IS PERMISSIBLE ONLY IN RESPECT OF INTERNATIONAL TRANSACTION , WHICH, IN TURN, MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES . SIMILAR POSITION HAS BEEN REITERATED IN THE MACHINERY PROVISION CONTAINED IN SECTION 92C DEALING WITH THE MANNER OF COMPUTATION OF ALP. SUB-SECTION (1) OF SE CTION 92C STIPULATES THAT :` THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIO NAL ITA NOS.2036 &1849/DEL/2014 7 TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLO WING METHODS.. . THE NITTY-GRITTY OF THE ABOVE DISCUSSION IS THAT AD DITION BY WAY OF TRANSFER PRICING ADJUSTMENT IS MANDATED ONLY IN RES PECT OF TRANSACTIONS BETWEEN TWO OR MORE AES. A FORTIORARI, NO INCOME ARISING FROM NON- AE TRANSACTIONS CAN BE COMPUTED HAVING REGARD TO IT S ALP. IN FACT, PRICE/PROFIT FROM COMPARABLE TRANSACTIONS OF THE AS SESSEE WITH NON-AES, IS ONE OF THE SUBTLE AND MOST RELIABLE MODES FOR DE TERMINING ALP OF THE INTERNATIONAL TRANSACTIONS. THUS, IT BOILS DOWN TH AT THE ACT DOES NOT CONTEMPLATE AN ADDITION BY WAY OF TRANSFER PRICING ADJUSTMENT IN RESPECT OF TRANSACTIONS WITH NON-AES. AS THE TPO VENTURED T O MAKE A COMPOSITE ADDITION AND THE LD. CIT(A) RESTRICTED IT TO THE TR ANSACTIONS WITH AES, WE UPHOLD, IN PRINCIPLE, THE VIEW POINT OF THE LD. CIT (A). OUR VIEW IS FORTIFIED BY THE JUDGMENT RENDERED BY THE HONBLE J URISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. KEIHIN PANALFA LTD., (2016) 381 ITR 407 (DEL) . ITA NOS.2036 &1849/DEL/2014 8 7. NOW COMES THE MANNER OF ALLOWING RELIEF BY THE L D. CIT(A) ON MERITS. THE LD. CIT(A) RESTRICTED THE AMOUNT OF TRA NSFER PRICING ADDITION TO TRANSACTIONS WITH AES IN THE FOLLOWING MANNER : - PARTICULARS FORMULA VALUE (IN INR CRS.) OPERATING INCOME OF THE APPELLANT A 32.57 COST OF IMPORTED RAW MATERIAL & SPARES CONSUMED B 6.31 TOTAL COST OF OPERATION C 31.17 COST OF IMPORTED RAW MATERIAL & SPARES CONSUMED AS % TO TOTAL COST OF OPERATION D 20.24% ARMS LENGTH OPERATING PROFIT @ 7.74% (AS DETERMINED BY TPO IN HIS ORDER) E=7.74% OF A 2.52 ACTUAL OPERATING PROFIT EARNED BY THE APPELLANT AT THE ENTITY LEVEL F 1.40 DEFICIT IN OPERATING PROFIT AT THE ENTITY LEVEL G 1.12 DEFICIT OPERATING PROFIT ATTRIBUTABLE TO THE APPELLANTS INTERNATIONAL TRANSACTION H=20.24% OF G 0.23 8. IT CAN BE SEEN THAT THE AMOUNT OF TRANSFER PRICI NG ADJUSTMENT AT ENTITY LEVEL MADE BY THE TPO AT RS.1.12 CRORE APPEA RS AT G IN THE ABOVE TABLE. THE LD. CIT(A) RESTRICTED IT RS.23 LA C UNDER H BY APPLYING PERCENTAGE OF 20.24% TO THE AMOUNT OF TOTA L TRANSFER PRICING ADDITION AT THE ENTITY LEVEL. THIS 20.24% HAS BEEN COMPUTED BY DIVIDING RS.6.31 CRORE WITH RS.31.17 CRORE MULTIPLIED BY 1 00 I.E., 6.31/31.17 X 100. RS.6.31 CRORE IS THE VALUE OF THE INTERNATION AL TRANSACTION OF ITA NOS.2036 &1849/DEL/2014 9 PURCHASE OF RAW MATERIAL AND COMPONENT AND ALSO PUR CHASE OF MACHINERY/SPARES ETC. RS.31.17 CRORE IS THE TOTAL COST OF OPERATION AS PER C IN THE TABLE. IN OUR CONSIDERED OPINION, T HE LD. CIT(A) WENT WRONG IN ADOPTING THESE TWO FIGURES. HE UNDERTOOK THIS CALCULATION FOR SEGREGATING PROFIT FROM THE AE TRANSACTION OF PURCH ASE OF RAW MATERIAL AND COMPONENTS FROM THE OVERALL OPERATING PROFIT OF THE ASSESSEE. WE HAVE NOTED ABOVE THAT THE TPO PROPOSED TRANSFER PRI CING ADJUSTMENT ONLY W.R.T. THE INTERNATIONAL TRANSACTION OF `PURC HASE OF RAW MATERIAL AND COMPONENTS AND NOT THE OTHER INTERNATIONAL TRANSAC TION OF `PURCHASE OF MACHINERY/SPARES ETC.. NO BIFURCATION IS AVAILABL E OF THE TRANSACTION OF PURCHASE OF MACHINERY AND SPARES ETC. OBVIOUSLY, PU RCHASE OF MACHINERY CANNOT DIRECTLY AFFECT THE OPERATING PROFIT EXCEPT THROUGH THE AMOUNT OF DEPRECIATION ON ALP OF PURCHASE PRICE OF THE MACHIN ERY, WHICH HAS NOT BEEN DETERMINED BY THE TPO OR THE LD. CIT(A). THE OTHER COMPONENT OF THIS INTERNATIONAL TRANSACTION, BEING THE PURCHASE OF SPARES ETC., HAS BEEN TAKEN BY THE TPO AT ALP. THIS SHOWS THAT WE NEED TO WORK OUT THE PROFIT FROM THE INTERNATIONAL TRANSACTION OF `PURCH ASE OF RAW MATERIAL AND COMPONENTS ALONE. THIS CAN BE DONE BY APPORTIONING THE TOTAL OPERATING ITA NOS.2036 &1849/DEL/2014 10 PROFIT IN THE RATIO OF `UTILIZED RAW MATERIAL PURC HASED FROM THE AES (I.E. OPENING STOCK OF RAW MATERIAL PURCHASED FROM THE AE S + PURCHASES OF RAW MATERIAL FROM THE AES CLOSING STOCK OF RAW MA TERIAL OUT OF THE ABOVE TRANSACTIONS WITH AES) AND `UTILIZED RAW MATE RIAL PURCHASED FROM NON-AES (I.E. OPENING STOCK OF RAW MATERIAL PURCHA SED FROM NON-AES + PURCHASES OF RAW MATERIAL FROM NON-AES CLOSING ST OCK OF RAW MATERIAL OUT OF THE ABOVE TRANSACTIONS WITH NON-AES). OR ALT ERNATIVELY, THE SHARE OF OPERATING PROFIT FROM THE `UTILIZED RAW MATERIAL PURCHASED FROM THE AES CAN BE DEDUCED FROM THE TOTAL AMOUNT OF OPERAT ING PROFIT BY DIVIDING THE AMOUNT OF `UTILIZED RAW MATERIAL PURCH ASED FROM THE AES WITH THE OVERALL AMOUNT OF `UTILIZED RAW MATERIAL P URCHASED FROM THE AES AND NON-AES. 9. WHEN WE ADVERT TO THE CALCULATION OF THE LD. CIT(A), IT CAN BE SEEN THAT HE HAS TAKEN RS.6.31 CRORE AS NUMERATOR, WHICH IS THE VALUE OF BOTH THE INTERNATIONAL TRANSACTIONS OF `PURCHASE TRANSAC TION OF RAW MATERIAL AND COMPONENTS AND `PURCHASE OF MACHINERY/SPARES E TC. THE DENOMINATOR IN THE LD. CIT(A)S FORMULA IS RS.31.17 CRORE, WHICH IS ITA NOS.2036 &1849/DEL/2014 11 TOTAL COST OF OPERATIONS BEING ITEM C IN HIS TA BLE. ON A PERTINENT QUERY, IT WAS STATED THAT RS.31.17 CRORE IS THE TOT AL COST OF GOODS SOLD, WHICH NOT INCLUDES THE COST OF RAW MATERIAL BUT ALS O OTHER DIRECT COSTS, SUCH AS, WAGES AND POWER ETC. IN OUR CONSIDERED OPI NION, THERE IS NO LOGIC IN CONSIDERING ALL THE OTHER OPERATING COSTS IN DENOMINATOR ALONE, WHEN THE NUMERATOR IS EXCLUSIVE OF SUCH OTHER OPERA TING COSTS. EITHER THE OTHER OPERATING COSTS RELATING TO RAW MATERIALS PUR CHASED FROM AES SHOULD ALSO HAVE BEEN INCLUDED IN THE NUMERATOR OR THESE SHOULD HAVE BEEN ELIMINATED FROM THE DENOMINATOR AS WELL. TAKIN G OTHER OPERATING COSTS ONLY IN DENOMINATOR ALONE HAS DISTORTED THE A PPORTIONMENT OF PROFIT BETWEEN THE INTERNATIONAL TRANSACTIONS AND NON-INTE RNATIONAL TRANSACTIONS. MORE APPROPRIATE COURSE, IN OUR CONSIDERED OPINION, IS TO APPORTION THE TOTAL OPERATING PROFIT OF THE ASSESSEE TO THE INTER NATIONAL TRANSACTION BY DIVIDING THE AMOUNT OF `UTILIZED RAW MATERIAL PURCH ASED FROM THE AES WITH THE OVERALL AMOUNT OF `UTILIZED RAW MATERIAL P URCHASED FROM THE AES AND NON-AES, AS HAS BEEN DISCUSSED SUPRA . WE ORDER ACCORDINGLY. AS THE NECESSARY FIGURES OF NUMERATOR AND DENOMINAT OR IN THE MANNER DISCUSSED ABOVE, ARE NOT READILY AVAILABLE WITH THE LD. AR, WE, THEREFORE, ITA NOS.2036 &1849/DEL/2014 12 SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER T O THE FILE OF AO/TPO FOR DOING THE NEEDFUL IN ABOVE TERMS. NEEDLESS TO S AY, THE ASSESSEE WILL BE GIVEN AN ADEQUATE OPPORTUNITY OF HEARING IN DOIN G THE ABOVE EXERCISE. 10. THIS BRINGS US TO THE ASSESSEES GRIEVANCE ABOU T THE NON-GRANTING OF +/- 5% ADJUSTMENT WHICH THE LD. CIT(A) DID NOT A LLOW WITHOUT ASSIGNING ANY REASON. 11. SECTION 92(1) PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. SECTION 92B(1) DEFINES INTERNATIONA L TRANSACTION TO MEAN ..A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENT ERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDENTS, IN THE NATURE OF PU RCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR LENDING OR BORROWING MONEY OR ANY OTHER TRANSACTION HAVING A B EARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRIS ES. . SECTION 92C DEALING WITH THE COMPUTATION OF ARMS LENGTH PRICE PROVIDES THROUGH SUB-SECTION (1) THAT : THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE FOLLOWING ITA NOS.2036 &1849/DEL/2014 13 METHODS, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTIONS OR CLASS OF TRANSACTION OR C LASS OF ASSOCIATED PERSONS. . WHEN WE READ THE ABOVE DISCUSSED THREE PROVISION S, IT CLEARLY EMERGES THAT FIRSTLY, THERE SHOULD BE AN IN TERNATIONAL TRANSACTION; SECONDLY, THERE SHOULD BE INCOME ARISING FROM SUCH INTERNATIONAL TRANSACTION; AND THIRDLY, SUCH INCOME SHOULD BE COM PUTED HAVING REGARD TO THE ARMS LENGTH PRICE. WHAT WE COMPUTE IS INCOM E AND THE BASE FROM WHICH SUCH INCOME IS COMPUTED, IS AN INTERNATIONAL TRANSACTION, WHICH CAN BE IN THE NATURE OF PURCHASE OR SALE OR PROVISI ON OF SERVICES ETC. WITH THIS BACKGROUND IN MIND, LET US HAVE A LOOK AT PROVISO TO SECTION 92C(2) AT THE MATERIAL TIME, WHICH READS AS UNDER:- PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMI NED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES , OR, AT THE OPTION OF THE ASSESSEE, A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING FIVE PER CENT OF SUCH ARITHMETICAL MEAN. 12. THE ALP IS NOTHING BUT A BENCHMARK OR A ST ANDARD PRICE MEANT FOR COMPARISON WITH THE PRICE CHARGED OR PAID BY TH E ASSESSEE IN THE INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTER PRISE. SINCE THIS ITA NOS.2036 &1849/DEL/2014 14 STANDARD PRICE CONSTITUTES THE BASIS FOR MAKING ADD ITION IN THE HANDS OF THE ASSSESSEE ON ACCOUNT OF ITS INTERNATIONAL TRANS ACTIONS WITH THE ASSOCIATED ENTERPRISES, THE LEGISLATURE, IN ORDER T O IRON OUT THE DIFFERENCES BETWEEN THE ACTUAL TRANSACTED PRICE AND SUCH STANDA RD PRICE, INSERTED PROVISO TO SECTION 92C(2). THE ROLE OF THIS PROVISO IS TO MAKE SUCH STANDARD PRICE OR ALP FLEXIBLE AND NOT RIGID. IT HA S BEEN PROVIDED THAT IF THE PRICE ACTUALLY CHARGED OR PAID BY THE ASSESSEE FALLS WITHIN PLUS MINUS 5% RANGE OF SUCH ALP OR STANDARD PRICE, THEN NO ADD ITION SHOULD BE MADE. 13. FROM THE LANGUAGE OF THE ABOVE PROVISO, IT CAN BE NOTICED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHODS, THE ARMS LENGTH PRICE SHALL BE TAKEN TO B E THE ARITHMETICAL MEAN OF SUCH PRICES. A FURTHER OPTION HAS BEEN GIV EN TO THE ASSESSEE BY WHICH VARIATION UP TO PLUS MINUS 5% OF `SUCH ARITHM ETICAL MEAN CAN BE IGNORED. THE FORMER PART OF THE PROVISO TALKS OF TH E ALP AS ARITHMETICAL MEAN OF SUCH PRICES AND THE LATER PART OF THE PROVISO REFERS TO FIVE PERCENT OF SUCH ARITHMETICAL MEAN. THE WORD ` SUCH ARITHMETICAL MEAN ITA NOS.2036 &1849/DEL/2014 15 BRINGS THE FOCUS BACK TO THE PRICE. THUS THE PRESCRIPTION OF THIS PROVISO MAKES IT CLEAR THAT THE PLUS MINUS FIVE PERCENT IS ON THE PRICE AND NOT ON THE PROFIT EMBEDDED IN SUCH PRICE. 14. THE CONCLUSION THAT PLUS MINUS 5% SHOULD BE APPLIED TO THE PRICE OF PURCHASE OR SALE OR SERVICES ETC. INSTEAD OF INC OME COMPONENT IN SUCH PRICE IS FORTIFIED FROM THE MANDATE OF THE METHODS FOR DETERMINATION OF ARMS LENGTH PRICE. SECTION 92C(1) GIVES FIVE SPECI FIC METHODS FOR COMPUTING ARMS LENGTH PRICE. RULE 10B DEALS WITH T HE DETERMINATION OF ARMS LENGTH PRICE UNDER SUCH METHODS. FIRST IS COM PARABLE UNCONTROLLED PRICE (CUP) METHOD, UNDER WHICH THE PR ICE CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION IS FIRST IDENTIFIED. AFTER MAKING CERTAIN ADJUSTMENTS TO MAKE IT COMPATIBLE WITH THE INTERNAT IONAL TRANSACTION, THE ADJUSTED PRICE IS TAKEN AS ARMS LENGTH PRICE IN RE SPECT OF PROPERTY TRANSFERRED OR SERVICES PROVIDED IN THE INTERNATION AL TRANSACTION. THUS IT CAN BE NOTICED THAT WHAT IS DETERMINED UNDER THIS M ETHOD IS THE PRICE. WHEN WE REFER TO PLUS MINUS 5% OF THE VALUE DETERMI NED UNDER THIS METHOD AS PER PROVISO TO SECTION 92C(2), IT INEVITA BLY REFERS TO THE FIGURE ITA NOS.2036 &1849/DEL/2014 16 DETERMINED UNDER THIS METHOD, WHICH IS PRICE AND NO T PROFIT EMBEDDED IN THE PRICE. FOR EXAMPLE, IF AN ASSESSEE HAS SOLD GOO DS TO ITS AE WORTH RS.100 AND THE ALP IN RESPECT OF SUCH GOODS SOLD UN DER CUP METHOD IS SAY RS.103 OR RS.98, THEN NO ADJUSTMENT IS REQUIRED BECAUSE IT IS WITHIN 5% OF RS.100, BEING THE PRICE AT WHICH GOODS WERE SOLD TO ASSOCIATED ENTERPRISES IN THE INTERNATIONAL TRANSACTION. IRRES PECTIVE OF THE FACT WHETHER THE PROFIT COMPONENT IN THE SALE VALUE OF R S.100 IS RS.4 OR RS.8 OR RS.10, IT IS, IN FACT, THE COMPARISON OF THE PRI CE CHARGED OR PAID FOR PROPERTY TRANSFERRED WHICH IS THE SUBJECT MATTER OF PROVISO TO SECTION 92C(2). THUS IT CAN BE SEEN THAT THE PLUS MINUS 5% IS REQUIRED ON THE VALUE OF INTERNATIONAL TRANSACTION, BEING THE PURCH ASE PRICE IN THE INSTANT CASE AND NOT ON THE PROFIT ELEMENT IN SUCH TRANSACT IONS. WE, THEREFORE, DIRECT THAT +-5% SHOULD BE GIVEN EFFECT IN THE CALC ULATION OF THE TRANSFER PRICING ADJUSTMENT FROM THE INTERNATIONAL TRANSACTI ON, IF ANY. IT IS HOWEVER, CLARIFIED, THAT THIS +-5% IS NOT A STANDAR D DEDUCTION. THIS BENEFIT IS TO BE GIVEN ONLY IF THE ALP FALLS WITHIN +-5% RANGE OF THE PRICE AND NOT OTHERWISE. ITA NOS.2036 &1849/DEL/2014 17 15. IN THE RESULT, BOTH THE APPEALS ARE ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 03.03.201 7. SD/- SD/- [KULDIP SINGH] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 03 RD MARCH, 2017. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.