2014 (8) TMI 1012 - AT - Income Tax

Admission of additional evidence - transfer pricing adjustment - Held that - All the evidences sought to be canvassed for admission are relevant and germane to appropriately determine the arm s length price of the international transactions entered by the assessee with its associated enterprises. Considering the circumstances explained by the assessee, and the bonafides of the reasons not having been assailed by the Revenue, the same deserve to be admitted. Therefore, we deem it fit and proper to admit the additional evidences having regard to the facts and circumstances of the present case. Once additional evidence is required to be admitted, there is no gainsaying that an appropriate opportunity to the Department is required to be afforded to consider and evaluate the evidence for the purposes of working out the appropriate tax liability of the assessee. Therefore, we deem it fit and proper to set-aside the orders of the authorities below on the aspect of the transfer pricing assessment, and restore the matter back to the file of the Assessing Officer who shall re-visit the determination of arm s length price of the international transactions having regard to the material and submissions that assessee may put-forth in support of its stand, including the aforesaid additional evidence. Needless to say, the Assessing Officer shall allow an appropriate opportunity to the assessee of being heard and to furnish appropriate material and evidence in support of its plea that the international transactions entered into with the associated enterprises during the year under consideration are at an arm s length price. The Assessing Officer shall consider the submissions and material put-forth by the assessee and thereafter pass an appropriate order in accordance with law. Addition on deduction on account of product warranty liability - Held that - We find that in para 5 of the assessment order, the Assessing Officer has summarily sustained the disallowance of ₹ 8,95,141/- on account of provision of warranty existence without determination the issues, which the DRP required him to address. Therefore, we are unable to uphold the order of the Assessing Officer on this aspect also. As a consequence, we set-aside the assessment order on this aspect also and direct the Assessing Officer to pass a speaking order after taking into consideration each of the points enumerated by the DRP in its order dated 30.08.2010 on this aspect. Needless to mention, the assessee shall furnish relevant material as would be required by the Assessing Officer to carry out the directions of the DRP. The Assessing Officer shall consider the material and submissions put-forth by the assessee and thereafter pass an order on this aspect afresh in accordance with law - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Transfer Pricing Adjustment for international transactions.
2. Addition on account of product warranty liability.

Detailed Analysis:

Issue 1: Transfer Pricing Adjustment for International Transactions

The appellant company, previously known as Suessen Asia Pvt. Ltd., filed a return for the assessment year 2006-07, reporting a net loss of Rs. 3,71,99,855/-. The company engaged in international transactions involving the import and export of textile machinery, components, and parts, as well as providing and availing miscellaneous services with its associated enterprises.

The Transfer Pricing Officer (TPO) noted that the assessee had aggregated all transactions and applied the Transactional Net Margin (TNM) Method on an aggregate level, using data from seven comparable companies. The TPO excluded one comparable, W.H. Brady & Company Ltd., for being functionally incomparable, resulting in an average Profit Level Indicator (PLI) of 0.36%. The TPO also reworked the assessee's net profit margin by excluding a write-back of an unsecured loan, resulting in an operating margin of (-) 24.55%, leading to an upward adjustment of Rs. 8,11,47,490/-.

The assessee sought to introduce additional evidence to support its case, including annual reports of comparables, evidence of net worth, and audited segmental profitability statements. The Tribunal admitted the additional evidence, noting its relevance to determining the arm's length price of the international transactions. The matter was remanded to the Assessing Officer for re-evaluation, allowing the assessee to present the additional evidence and submissions.

Issue 2: Addition on Account of Product Warranty Liability

The second issue involved an addition of Rs. 8,95,141/- related to the assessee's claim for deduction on account of product warranty liability. The Dispute Resolution Panel (DRP) directed the Assessing Officer to consider several factors, including whether the warranty was an integral part of the sale price, whether the assessee had a present obligation based on past experience, and whether the future liability could be ascertained and discounted on an accrual basis, referencing the Supreme Court decision in Rotork Controls India P. Ltd. vs. CIT.

The Assessing Officer, however, summarily sustained the disallowance without addressing the DRP's directives. The Tribunal set aside the assessment order on this issue, directing the Assessing Officer to pass a speaking order after considering the DRP's enumerated points and allowing the assessee to furnish relevant material.

Conclusion

The appeal was allowed for statistical purposes, with both issues remanded to the Assessing Officer for re-evaluation based on additional evidence and specific directives provided by the Tribunal and the DRP. The Tribunal emphasized the necessity of a thorough and just determination of the assessee's tax liability, ensuring all relevant factors and evidence are duly considered.