ACIT vs. Essar Steel Ltd (ITAT Vizag)

Transfer Pricing: +/- 5% Variation only if more than one price determined. CBDT Circular No. 12 dated 23.8.2001 is otiose

The assessee sold iron ore pellets to STEMCOR, Singapore, an Affiliate Entity (AE) for Rs. 66.08 crores. The assessee sold similar items to “Non Associated Enterprises” (NAE) in Hong Kong and Switzerland. There was no dispute that the “Comparable Uncontrolled Price” method was to be adopted for determining the ALP. The TPO determined the ALP at Rs.67.20 crores by comparing the ratio of “Net Profit/Cost” in the transactions entered with AE and NAE which was 12.35% in respect of AE and 14.04% in respect of NAE. Thus there was a shortage of 1.69% in respect of transaction entered with AE vis-à-vis NAE. The TPO directed that an addition of Rs. 1.11 crores be made. In appeal, the CIT (A) relied on Circular No.12 dated 23.8.2001 issued by CBDT and held that as the variation between in transactions with AE and NAE was less than 5%, no addition could be made. On appeal by the department, HELD reversing the CIT (A):

(ii) CBDT Circular No.12 dated 23.8.2001 which provides that “the AO shall not make any adjustment to the arm’s length price determined by the taxpayer if such price is unto 5% less or unto 5% more than the price determined by the AO” was in the context of the proviso to s. 92C (2) inserted by FA 2001 w.e.f. AY 2002-03. Though the proviso provided for only arithmetical mean of the prices to be taken and did not provide for any concession, the Circular was issued considering practical difficulties. The said Proviso was amended by FA 2002 w.e.f AY 2002-03. The effect is that the Proviso in the context of which Circular No. 12 was issued never came into operation and so the Circular No. 12 is otiose and cannot be relied upon;

(ii) The benefit of +/- 5% variation as per the Proviso to s. 92C (2) is available only if more than one price is determined. It does not apply where only one price has been determined.