Section 92C(2): 5% Tolerance Benefit Available Even with a Single Comparable, Rules ITAT

Overview

In a significant transfer pricing ruling, the Kolkata ITAT in Philips India Limited v. Assistant Commissioner of Income Tax held that the benefit of the tolerance band under the second proviso to Section 92C(2) is available even when only one comparable company remains in the final comparable set.

Section 92C(2) provides that where multiple arm's length prices (ALPs) are determined using the most appropriate method, their arithmetic mean is treated as the ALP. The second proviso further states that if the variation between the ALP so determined and the actual transaction price falls within the prescribed tolerance limit, the actual transaction price shall be deemed to be the arm's length price.

The Tribunal clarified that the phrase "ALP so determined" covers not only cases where multiple comparables are used and an arithmetic mean is computed, but also situations where a single comparable remains after the transfer pricing analysis. Therefore, the tolerance benefit is not restricted to cases involving multiple comparables.

In the present case, the TPO rejected six out of seven comparables selected by the assessee, leaving only one comparable in the final set. Since the variation between the assessee's transaction price and the ALP derived from the sole comparable was within the prescribed tolerance range of ±5%, the ITAT held that the assessee was entitled to the benefit of the second proviso to Section 92C(2).

The ruling reinforces that the transfer pricing tolerance band is available irrespective of whether the ALP is derived from one comparable or multiple comparables, provided the prescribed variation threshold is satisfied.

Section 92C(2) of the Income Tax Act states as follows -

"92C(2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed:

Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices:

Provided further that if the variation between the arm's length price so determined and price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed such percentage not exceeding three per cent of the latter, as may be notified by the Central Government in the Official Gazette in this behalf] the price at which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm's length price…"

As per the first proviso where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices. Per contra, if there is only one price which is determined by the most appropriate method, then as per the main subsection (2) without the aid of proviso, that price shall constitute the ALP. The second proviso comes into play to deem the actual transacted price as the ALP. It provides that where the variation between the ALP "so determined" does not exceed the specified percentage, the price at which the international transaction has actually been undertaken 'shall be deemed to be the arm's length price'. The words 'so determined' as employed in the second proviso assume significance. As these have been used in the second proviso distinct from the subject matter of the first proviso, these will apply to the ALP determined under sub-section (2) consisting of the main provision and also the first proviso. Resultantly, the option of 'deemed' ALP shall extend not only to a situation where more than one price is determined as ALP by the most appropriate method but also where only one price is determined as ALP. The net result is that the option to the assessee shall be available in both the situations, covered under main subsection (2) and also the first provision. 

Hence in the case of PHILIPS INDIA LIMITED Vs ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-12(2), KOLKATA [2023-VIL-478-ITAT-KOL], where TPO had rejected six out of seven comparable companies identified by assessee and only one comparable remained in comparable set, and that comparable fell within tolerance limit of +/- 5% as contained in Section 92C(2) of the Act, Benefit of tolerance limit under 2nd proviso to Section 92(C)(2) of the Act was considered to be available to assessee.