Arithmetic mean over weighted average mean

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DCIT vs Ankit Metal & Power Ltd; Income Tax Appellate Tribunal Kolkata

The assessee company was engaged in the business of manufacturing Ferro-alloys, Ingots, trading in TMT Bar and selling beneficiation coal. For AY 2013-14, being the year under appeal, the assessee company has filed its Return of Income on 30.11.2013 declaring a total loss of Rs. 13.70 crores. The assessee paid tax on book profit u/s 115JB at Rs.13.7 crores. The Assessee’s case was selected for scrutiny through CASS and statutory notices were served upon the assessee to which the assessee responded with the requisite explanation/documents. Thereafter, the AO referred the domestic specific transaction with the related parties to TPO.

SDT transaction involving the purchase of raw materials for sister concern/ AE

TPO noted that the assessee had purchased several raw materials from its related parties. The assessee had benchmarked these purchases applying the Comparable Uncontrolled Price Method (‘CUP’ Method). The assessee had demonstrated in the Transfer Pricing Study Report (TPSR) that the rates at which the related parties sold these raw materials to the assessee were comparatively lower than the average rate at which the same related parties sold these raw materials to unrelated/independent customers. However, according to the TPO, the rates at which the assessee had purchased the raw materials ought to have been compared with the minimum/lowest rate at which the related parties sold the same raw material to unrelated/independent parties.

TPO observed that the assessee had purchased from its related parties at a price higher than the price at which the product was sold by them to the unrelated parties and that such difference was outside the ambit of +/- 3% range as per sec 92(2) of the Act. TPO accordingly proposed a TP adjustment. Aggrieved, the assessee preferred an appeal before CIT(A), wherein CIT(A) accepted the assessee’s appeal and deleted the downward adjustment.

Aggrieved, The Revenue preferred an appeal before ITAT.

ITAT noted that the dispute was wrt to the determination of arm’s length price of SDT involving the purchase of raw materials by the assessee from its sister concern/AE. ITAT further noted that the CUP method adopted by the assessee has not been disputed by the AO/TPO and that the only dispute was concerning the manner of application of CUP for the SDT.

Further noted that the assessee had benchmarked the SDT with the ‘arithmetical mean rate’ at which the related parties sold the same product to independent buyers and that the TPO had benchmarked it by taking the ‘lowest/minimum rate’ at which the related parties sold the same product to independent buyers, ignoring all other comparable uncontrolled transactions.

ITAT further found that benchmarking methodology followed by the TPO is prima facie perverse and against the extant provisions contained in the proviso to Section 92C(2) of the Act, which clearly stated that where more than one comparable prices are available, then the arithmetical mean shall be taken as the ALP. Accordingly, ITAT held that “CIT(A) had therefore rightly deleted the impugned transfer pricing adjustment”.

ITAT also noted that CIT(A) had not supported this arbitrary/whimsical benchmarking analysis of the TPO, but at the same time, it is his case that, believed that instead of arithmetical mean rate, the weighted average mean of the product sold by the related parties to independent buyers should be taken as the comparable rate.

Further owing to the proviso to Sec 92C(2), ITAT opined that assessee had rightly pointed out that proviso to Section 92C(2) only speaks about ‘arithmetical mean’ and therefore the concept of ‘weighted average mean’ cannot be applied in the facts of the present case.

Further opined that when the computation of arithmetical mean has been expressly set out in the said provision,  Tribunal is not permitted to ignore or overlook the said expression and read weighted average mean in its place.

ITAT further relied on the Mumbai Tribunal decision in the case of RBS Equities (India) Ltd wherein Tribunal had upheld Revenue’s lea for use of arithmetical mean instead of weighted average mean.

Accordingly, ITAT held that “we do not find any force in the Ld. CIT, DR’s contention for use of weighted average mean as against arithmetical mean computed by the assessee”.

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