Arm's Length Price cannot be Done Except under one of the Methods Prescribed u/s 92C(1)of Income Tax Act: ITAT deletes TP Adjustment based on Adhoc Estimation [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has deleted the Transfer Pricing (TP) adjustment based on adhoc estimation basis holding that the Arm’s Length Price could not be done under one of the methods prescribed under Section 92C(1) of the Income Tax Act 1961.

The assessee Mondelez India Foods Private Ltd (formerly known as Cadbury India Limited) was a subsidiary of Cadbury Overseas Ltd UK which holds 58.63% and Cadbury Mauritius Ltd which holds 38.97% of the equity shareholding while the balance 2.41% equity shareholding was held by Indian public company comprising of various shareholders. The assessee was incorporated in the year 1948 as Cadbury Fry (India) Private Limited. The assessee was in the business of manufacturing and marketing of malted food drinks, cake, powder chocolates, toffees, drinking chocolate and sugar confectionery.

The TPO during the transfer pricing proceedings noticed that the assessee had entered into service agreement dated 21/10/2005 with Cadbury Enterprises Pte Ltd for availing certain services such as business strategy, financial planning and accounting supply chain, co-ordination and planning human resources legally and marketing, etc. The assessee during the year under consideration, had made a payment towards availing these services where the AE had charged cost plus 5% for providing the services.

The TPO was of the view that the nature of services of rendered by the Associated Enterprises (AE) were not in the nature of on-call services and that the assessee could neither furnish any evidence to show the actual rendering of services nor could show the actual cost incurred by the AE. The TPO applied CUP method and worked out the man-hour rate of the employee based on the estimated salary per month.

This estimate of the salary cost by the TPO was based on the increments that may have occurred in foreign exchange rate, the inflation rate between FY 2009-10 and FY 2010-11. The TPO took the average working days per month at 22 and 8 hour per day. The TPO accordingly determined ALP. The TPO considered the man hours applied in AY 2010-11 for determination of ALP and since there was a reduction in the cost paid by 57.15% the TPO applied the reduction percentage on the man hours. Based on the same the TPO made an adjustment towards the differential amount.

J.D. Mistri, on behalf of the assessee submitted that the issue was covered by the decision of the coordinate bench in assessee’s own case for A.Y. 2009-10 where it had been held that, the TPO had not followed the CUP method but has arrived at the ALP on some estimation. It was further submitted that the determination of ALP cannot be done except under one of the methods as prescribed in section 92C(1) and therefore the TPO's computation of ALP based on adhoc assumptions was not correct.

Uodol Raj Singh, appeared on behalf of the revenue.

The two-member Bench of Vikas Awasthy (Judicial Member) and Padmavathy S. (Accountant Member) noticed that the TPO while arriving at the ALP had used the estimated salary and also used earlier years man hours to determine the current year man hours spent. The Bench held that the TP adjustment was not tenable by relying on the decision in the case of Kodak India Pvt. Ltd, "The arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe."

The Bench allowed this ground of appeal filed by the assessee holding that the ambit of the word any in Section 92C(1) of the Income Tax Act had been restricted within the precinct of the five specific methods.

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