Cummins India Limited vs. DCIT (ITAT Pune)

Transfer Pricing: If ALP determined by arithmetical mean, 5% deduction allowable

In determining the arms’ length price for transfer pricing purposes in respect of international transactions relating to ‘procurement Support Services’, the TPO considered 61 comparable prices and finally relied on 3 prices to arrive at the arithmetic mean. However, he did not give a deduction from the arithmetic mean as required by the first proviso to s. 92C(2). On appeal to the Tribunal, HELD:

(i) The First proviso to s.92C(2) (pre amendment by F (No 2) Act 2009 w.e.f. 1.10.09) which provides that “where more than one price is determined by the most appropriate method, the arms length price shall be taken to be the arithmetical mean of such prices or at the option of the assessee, a price which may vary from the arithmetical mean of an amount not exceeding five per cent of such arithmetical mean” is clear that the assessee has an option when there is arithmetical mean involved while computing the ‘arm’s length price’ and it happens only if more than one price is determined by the most appropriate method. The First Proviso becomes operational where more than one comparable price is determined. The assessee at his option can make claim of deduction out of the arithmetic mean not exceeding 5%.

(ii) All the judicial pronouncements (SAP Labs 6 ITR (Trib) 81 (Bang), Sony 315 ITR (AT) 150 (Del), UE Trade Corp (Del), Essar Steel (Vizag) & Perot Systems 130 TTJ 685 (Del) are uniform in making the proposition that where arithmetic mean is involved, the assessee obtains the eligibility for claim of deduction out of such arithmetic mean. It is commonsense that the statistical concept of arithmetic mean arises only when there exists more than one price data. Such concept is irrelevant to the data with only one variable. In the assessee’s case, as there were three comparable price data, the assessee was entitled for deduction not exceeding 5% out of the arithmetic mean.