Rule 10D(1)

Rule 10D(1) — the law in short

What the courts have decided on section Rule 10D(1), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• ACIT v Dilipkumar V. Lakhi ITATHelps taxpayerNo later treatment found
  The TPO wants segment-wise profit and loss accounts for my AE and non-AE business and I cannot produce them. He has levied 2 per cent of the transaction value under s.271G. Can I resist it?
  Yes, where the failure is backed by a reasonable cause, because s.273B applies to s.271G. The Tribunal upheld the deletion of a Rs 56,72,162 penalty on a diamond trader who had furnished entity-level margins but could not split AE from non-AE segments, holding that in a trade where rough and polished diamonds move in mixed lots it is practically impossible to trace which rough stone became which polished stone, and that the assessee had substantially complied to the extent the trade allowed.
• Statutory position — rule 10B(3): the Income-tax Rules expressly contemplate a comparability adjustment and prescribe NO method for computing one — a proved negative across rules 10A, 10AB, 10B, 10C, 10CA, 10D and 10TA and s.92F, with nothing in any CBDT circular, instruction or departmental transfer pricing page either CBDT Circulars & InstructionsCuts both ways
  The Transfer Pricing Officer has thrown out my working capital adjustment saying there is no prescribed method for it. Is he right that there is no prescribed method, and if he is, what does that do to the claim?
  He is right on the first half and wrong on the second. No provision of the Income-tax Rules, 1962 prescribes a formula, a base, a period, a source of interest rates or any other method for computing a working capital adjustment or a risk adjustment. Rules 10A, 10AB, 10B, 10C, 10CA, 10D and 10TA were each read in full on this pass, and s.92F, and none of them does. But the absence of a method is not the absence of a power. Rule 10B(3) reads: "An uncontrolled transaction shall be comparable to an international transaction or a specified domestic transaction if— (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." The two limbs are joined by "or", and limb (ii) is an express statutory contemplation of the adjustment. Rule 10B(1)(e)(iii) goes further inside the net margin method itself: the net profit margin arising in comparable uncontrolled transactions "is adjusted to take into account the differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market" — the words are "is adjusted", not "may be adjusted". Rule 10C(2)(e) makes "the extent to which reliable and accurate adjustments can be made to account for differences" a statutory factor in selecting the most appropriate method, and rule 10D(1)(j) and (l) require the assessee to keep a record of "adjustments, if any, which were made to account for differences" and "details of the adjustments, if any, made to transfer prices". So the Rules name the adjustment four times over and never once say how to work it out. The expression "reasonably accurate" is not defined anywhere I could find: not in rule 10A, which is the definitions rule for rules 10A to 10E, and not in s.92F, which is the definitions section for ss.92 to 92E.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.