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Set transfer pricing value on deal basis, rules ITAT
June, 10th 2008

In what could provide relief to multinational taxpayers, the Income Tax Appellate Tribunal, Kolkata, has ruled that arms length price should be determined on a transaction and not aggregate basis.

The ITAT has ruled that barring cases where such transactions could not be separately valued, the income-tax department should resort to a transaction-by-transaction approach in reaching a transfer pricing value.

The tribunal turned aside the I-T departments decision to go in for an aggregate valuation of transfer pricing for an Indian construction and engineering company, after taking into account the fact that the enterprise had adequately submitted a detailed analysis of its international transactions.

The ruling has re-affirmed the preference for a transaction-by-transaction approach for performing a transfer pricing analysis. While the general principles emerging from this ruling can be expected to have some persuasive value, it may be noted that due to the factual nature of transfer pricing disputes, the ruling may set limited precedence if there are variations in facts, Ernst & Young tax partner Rajendra Nayak said.

The transfer pricing officer had claimed that the assessee company was not disclosing records and hence he applied the combined transaction approach to do an independent analysis. He compared the net operating margins earned by the company with the net margin earned by similar companies using the transaction net margin method.

However, the company filed all the necessary documents in its appellate proceedings before the income-tax appeals commissioner. Upholding the companys analysis, the ITAT, Kolkata, said the department had sufficient time to analyse and verify the documents, filed subsequently before them.

The ITAT said that the in order to most appropriate method for calculating the arms length price, it was first necessary to select the tested party, which shall be the least complex of the controlled taxpayer.

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