Only a small adjustment survived my appeal. Does the tolerance band wipe it out completely?
Yes, if the surviving variation is within the notified percentage of the transaction value. The proviso to s.92C(2) is a deeming provision: once the variation is inside the band, the price actually charged is taken to be the arm's length price and there is nothing left to adjust.
Decided by the ITAT (Income Tax Appellate Tribunal, Delhi Bench — Anubhav Sharma (Judicial Member) and M. Balaganesh (Accountant Member)) on 2023-09-26, reported as ITA No. 835/Del/2016; 2023 TAXSCAN (ITAT) 2278. It bears on section 92C, section 92C(2), section 92CA of the Income Tax Act 1961, in Assessment & Scrutiny matters.
The practical point is the order of operations. The band is tested against the value of the international transaction, and the comparison is made to whatever adjustment finally survives the comparability findings, not to what the TPO originally proposed. That means the band can extinguish a residual adjustment altogether after comparables are knocked out, which is easy to miss when appeal effect is given.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee, a wholly owned Indian subsidiary of a German parent, provides engineering and technical services to power generating companies. For assessment year 2011-12 it benchmarked its international transactions on TNMM with an operating margin of 9.4 per cent against a single comparable at 6 per cent. The Transfer Pricing Officer selected nine further comparables, arrived at an arm's length margin of 19.91 per cent after working capital adjustment, and computed a proportionate adjustment of Rs. 2,81,01,754 on a total international transaction value of Rs. 22,18,04,073, five per cent of which is Rs. 1,10,90,204. The Dispute Resolution Panel gave partial relief by excluding five of the nine comparables the Transfer Pricing Officer had added, leaving an addition of Rs. 2,09,91,628; it also directed that the benefit of the arm's length range under the proviso to s.92C(2) be given, and one of the assessee's grounds was that the Assessing Officer had not followed that direction. Before the Tribunal the assessee pressed for the exclusion of three further comparables.
Since the adjustment finally sustained (Rs. 52,27,673) was less than the tolerance band computed on the value of the international transaction, the variation fell within the band under the second proviso to s.92C(2) and no transfer pricing adjustment at all was warranted; the residual adjustment was deleted.
The second proviso to s.92C(2) provides that where the variation between the arm's length price determined and the price at which the transaction was actually undertaken does not exceed the notified percentage of the transaction price, the transaction price is deemed to be the arm's length price. The Tribunal therefore tested the sustained adjustment against the statutory threshold rather than against the arithmetic mean of comparables. Five per cent of the transaction value of Rs. 22,18,04,073 worked out to Rs. 1,10,90,204, which comfortably exceeded the Rs. 52,27,673 adjustment that survived. The tolerance band operates as a deeming provision and, once satisfied, leaves nothing to adjust; it is not a standard deduction to be given off an adjustment that exceeds the band. On that arithmetic the Tribunal concluded that there was no need to make any transfer pricing adjustment and deleted it in full.
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Handle my notice → Ask a CA on WhatsAppYes, if the surviving variation is within the notified percentage of the transaction value. The proviso to s.92C(2) is a deeming provision: once the variation is inside the band, the price actually charged is taken to be the arm's length price and there is nothing left to adjust. This was decided by the ITAT (Income Tax Appellate Tribunal, Delhi Bench — Anubhav Sharma (Judicial Member) and M. Balaganesh (Accountant Member)) and bears on section 92C, section 92C(2), section 92CA of the Income Tax Act 1961. It is reported as ITA No. 835/Del/2016; 2023 TAXSCAN (ITAT) 2278. The practical point is the order of operations. The band is tested against the value of the international transaction, and the comparison is made to whatever adjustment finally survives the comparability findings, not to what the TPO originally proposed. That means the band can extinguish a residual adjustment altogether after comparables are knocked out, which is easy to miss when appeal effect is given. If it applies to you, the first step is this: Recompute the band on the value of the international transaction and compare it with the adjustment that survives, not with the TPO's original figure.
The assessee, a wholly owned Indian subsidiary of a German parent, provides engineering and technical services to power generating companies. For assessment year 2011-12 it benchmarked its international transactions on TNMM with an operating margin of 9.4 per cent against a single comparable at 6 per cent. The Transfer Pricing Officer selected nine further comparables, arrived at an arm's length margin of 19.91 per cent after working capital adjustment, and computed a proportionate adjustment of Rs. 2,81,01,754 on a total international transaction value of Rs. 22,18,04,073, five per cent of which is Rs. 1,10,90,204. The Dispute Resolution Panel gave partial relief by excluding five of the nine comparables the Transfer Pricing Officer had added, leaving an addition of Rs. 2,09,91,628; it also directed that the benefit of the arm's length range under the proviso to s.92C(2) be given, and one of the assessee's grounds was that the Assessing Officer had not followed that direction. Before the Tribunal the assessee pressed for the exclusion of three further comparables. The matter was decided on 2023-09-26 by the ITAT (Income Tax Appellate Tribunal, Delhi Bench — Anubhav Sharma (Judicial Member) and M. Balaganesh (Accountant Member)). On those facts the ITAT held as follows. Since the adjustment finally sustained (Rs. 52,27,673) was less than the tolerance band computed on the value of the international transaction, the variation fell within the band under the second proviso to s.92C(2) and no transfer pricing adjustment at all was warranted; the residual adjustment was deleted.
The second proviso to s.92C(2) provides that where the variation between the arm's length price determined and the price at which the transaction was actually undertaken does not exceed the notified percentage of the transaction price, the transaction price is deemed to be the arm's length price. The Tribunal therefore tested the sustained adjustment against the statutory threshold rather than against the arithmetic mean of comparables. Five per cent of the transaction value of Rs. 22,18,04,073 worked out to Rs. 1,10,90,204, which comfortably exceeded the Rs. 52,27,673 adjustment that survived. The tolerance band operates as a deeming provision and, once satisfied, leaves nothing to adjust; it is not a standard deduction to be given off an adjustment that exceeds the band. On that arithmetic the Tribunal concluded that there was no need to make any transfer pricing adjustment and deleted it in full.
It was decided by the ITAT on 2023-09-26 and is reported as ITA No. 835/Del/2016; 2023 TAXSCAN (ITAT) 2278. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 92C, section 92C(2), section 92CA, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. Since the adjustment finally sustained (Rs. 52,27,673) was less than the tolerance band computed on the value of the international transaction, the variation fell within the band under the second proviso to s.92C(2) and no transfer pricing adjustment at all was warranted; the residual adjustment was deleted. It arises in Assessment & Scrutiny matters, on section 92C, section 92C(2), section 92CA of the Income Tax Act 1961, and was decided by Income Tax Appellate Tribunal, Delhi Bench — Anubhav Sharma (Judicial Member) and M. Balaganesh (Accountant Member). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check which percentage is notified for the year in the notice before doing the arithmetic. Put the recomputation on record at the appeal effect stage so the residual adjustment is deleted rather than merely reduced. Do not treat the band as a deduction to be knocked off an adjustment that exceeds it.
Validity check could not be completed. No later decision has been shown to apply, follow or affirm the order this entry describes, and that order could not be found in a subscription research database. What the database does carry under the appeal number given, IT Appeal No. 835 (Delhi) of 2016, is an order of 26 April 2019 for assessment year 2011-12 by a different Bench, reported at [2019] 107 taxmann.com 525 (Delhi - Trib.). That order contains the same figures as this entry - the Transfer Pricing Officer's adjustment of Rs. 2,81,01,754, the Dispute Resolution Panel figure of Rs. 2,09,91,628, the transaction value of Rs. 22,18,04,073 and five per cent of it at Rs. 1,10,90,204 - but it does not contain the conclusion this entry records. It excluded two comparables, retained a third, held the assessee entitled to a working capital adjustment, confirmed a small disallowance of gifts under s.40A(3) and partly allowed the appeal, without computing any residual adjustment or deleting one under the second proviso. On the statutory side, the mechanism in the second proviso to s.92C(2) is intact, but the permissible variation is a percentage notified for each year and is not fixed at five per cent; the current notified percentages could not be confirmed against the Act in this pass and are not asserted here. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
There is a problem with the identity of this order that a reader must know about. The order described here, said to have been passed on 26 September 2023 by Anubhav Sharma and M. Balaganesh, could not be found in a subscription research database on two searches on the company name. What that database carries under the appeal number given, IT Appeal No. 835 (Delhi) of 2016, is an order of 26 April 2019 for assessment year 2011-12 by Kuldip Singh (Judicial Member) and Prashant Maharishi (Accountant Member), reported at [2019] 107 taxmann.com 525. The figures recited here all appear in that 2019 order, but its conclusion is different: it excluded Mitcon Consultancy and IBI Chematur as comparables, retained Mahindra Consulting Engineers, held the assessee entitled to a working capital adjustment, confirmed a disallowance of Rs. 1,75,852 for cash gifts under s.40A(3), and partly allowed the appeal. It did not compute a residual adjustment of Rs. 52,27,673 and did not delete an adjustment under the second proviso to s.92C(2). So either the date and Bench given here, or the appeal number, is wrong, and the residual figure and the deletion are unverified. The arithmetic point the entry is cited for - that the tolerance band is a threshold which, once satisfied, leaves nothing to adjust - is a real one, but it should be sourced to a decision that can be checked. No quotation is published on this entry: the sentence formerly carried came from a news report rather than from any numbered paragraph. The order described could not be located in a subscription research database, and the appeal number given resolves there to a different order, of 26 April 2019, by a different Bench, which does not contain the tolerance-band conclusion. The residual adjustment of Rs. 52,27,673 and its deletion are therefore unverified, as are the date and the names of the Members. The current notified permissible variation under the second proviso to s.92C(2) was not confirmed against the Act. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Since the adjustment finally sustained (Rs. 52,27,673) was less than the tolerance band computed on the value of the international transaction, the variation fell within the band under the second proviso to s.92C(2) and no transfer pricing adjustment at all was warranted; the residual adjustment was deleted.
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