Transfer Pricing: Scope of +/- 5% tolerance adjustment to ALP explained

The Special Bench was constituted to consider whether prior to the insertion of the second proviso to s. 92C(2), the benefit of 5% tolerance margin as prescribed under proviso to s. 92C(2) for the purposes of determining the arm’s length price of an international transaction is allowable as a standard deduction in all cases, or is allowable only if the difference is less than 5%. In the meanwhile the second proviso to s. 92C(2) was amended by the Finance Act, 2012 with retrospective effect from 1.4.2002. The assessee claimed, relying on Piagio Vehicle P. Ltd. vs. DCIT that even after the retrospective amendment by the Finance Act, 2012, it was entitled to the benefit of adjustment of +/- 5% variation while computing the ALP. It was also argued that the amendment was unconstitutional. HELD by the Special Bench:

There was a controversy on whether the +/- 5% tolerance adjustment was a standard deduction or not. After the retrospective amendment to the second proviso to s. 92C by the Finance Act, 2012 with retrospective effect from 1.4.2002, it is evident that if the variation between the arm’s length price and the price at which international transaction was actually undertaken does not exceed the specified percentage, then only the price at which the international transaction has actually been undertaken shall be deemed to be arm’s length price. Thus, the benefit of tolerance margin would be available only if the variation is within the tolerance margin. Once the variation exceeded the tolerance margin, then there would be no benefit even up to tolerance margin. Then, the ALP as worked out under s. 92C(1) shall be taken as ALP without any benefit of tolerance margin. The view taken in Piagio Vehicle was without considering the amendment and is per incuriam and not good law. The challenge to the constitutional validity of the retrospective amendment cannot be made before the Tribunal as it is a creation of the Act and not a constitutional authority.