ALP cannot be applied to determine ‘ordinary profits’ for computing S.10A deduction

ITA No. 2073/(Mds)/2011 – Assessment Year : 2007-08

Visual Graphics Computing Services (India) Pvt. Limited

The provisions of Transfer Pricing regulations contained in Section 92 belong to a separate code enacted for computing income from international transactions having regard to Arm’s Length Price (ALP) so as to confirm that there is no tax avoidance by the taxpayer. Operation of Transfer Pricing provisions ends when the Transfer Pricing Officer passes an order holding that the operating profit of the taxpayer is compatible with ALP norms and no adjustment is necessary.

Limiting the profit eligible for tax holiday under Section 10A(7) read with Section 80IA(10) must be independent of the order of the Transfer Pricing Officer and it is not permissible for the AO to work out the 1 0A deduction on the basis of the ALP profit determined under the order of the Transfer Pricing Officer. ALP is determined based on the MAM which can either be profit based or price based. In case of latter methods, profits are not considered but “derived” from prices and hence the adoption of ALP profits to determine what is “ordinary profits” for the purpose of Section 10A(7) cannot be justified. The Tribunal also considered the decision in the case of Tweezerman (India) Pvt Ltd wherein it was held that the AO was not justified to invoke provisions of Section 80IA(10) read with Section 1 0B(7) so as to reduce the eligible profits on the basis of the ALP computed by the Transfer Pricing Officer without showing how he determined that the tax payer had shown more than ordinary profits.