2016 (8) TMI 1182 - AT - Income Tax

Selection of a non-resident entity as a tested party - matter refereed to special bench - Held that - The successive Presidents of this Tribunal have consistently taken a position that in a situation in which the same issue is pending before the Hon ble High Court in assessee s own case, a special bench cannot be constituted to decide that issue. Thus we reject the contention of the learned Departmental Representative, and decline to refer the issue regarding selection of a non-resident entity as a tested party for the consideration of a special bench. Economic analysis undertaken by the Appellant in the transfer pricing documentation should be accepted and no adjustment should be carried out in relation to the intercompany transaction of import of parts and components. TPA - ALP adjustment in respect of royalty paid by the assessee to its Korean AE - Held that - given that there has been no change in the nature and terms of the international transaction of payment of royalty entered into by the assessee, there is no justification for taking a different view on a fundamental issue i.e. choice of the transfer pricing method when there are similar facts and hence, in line with the earlier year, internal CUP should be accepted as the most appropriate method for the current financial year. The above contention is in addition to the detailed objections filed by the assessee in the original proceedings before your goodself and learned DRP. Clearly, even in this round of proceedings, the assessee did not have much to say on the external comparable given by the TPO. Once an assessee is given a comparable instance an opportunity to explain as to why such a comparable should not adopted, and yet assessee remains quiet on the issue, it should not be open to him to be aggrieved of the same external comparable being adopted. No other material is on record to show that the assessee made any efforts to demonstrate that the said external comparable for CUP is not comparable with the facts of this case. Undoubtedly, a particular stand was taken in the assessment year 2005-06 but that was a stage in which no external comparable was available to the TPO. Now that an external comparable as CUP input is available, and the assessee has not made any efforts to show as to this CUP input in different in respect to the royalty transaction undertaken by the assessee, such an external comparable can indeed be accepted. We see no infirmity in the same and we, therefore, confirm the action of the TPO on this count. Disallowance on account of provision for obsolete inventory - Held that - In principle there is no need to interfere in the matter as the Tribunal, in assessee s own case, has held that the market value of such obsolete stock etc, which was quantified at 3.2%, is to be taken into account in computation of income. That is precisely what the Assessing Officer has done. However, in case the assessee can demonstrate that this residual value of the slow moving stock and inventory has been taken into account in computation of provision, to that extent, the disallowance will stand deleted. Disallowance on account of slow moving or obsolete staff - Held that - It is not in dispute that all the material facts and circumstances of the case are similar to that of the assessment year 2006-07 discussed above. In this view of the matter, and respectfully following our findings for the assessment year 2006-07, this issue is also remitted to the file of the Assessing Officer, and it is directed that the directions for the assessment year 2006-07 will apply mutatis mutandis for this assessment year as well. With these directions, this issue stands restored to the file of the Assessing Officer.

Issues Involved:
1. Maintainability of the appeal before the Tribunal.
2. Selection of the tested party for Transfer Pricing.
3. Arm’s Length Price (ALP) adjustments for Completely Knocked Down (CKD) kits.
4. ALP adjustments for Tech Centre operations.
5. ALP adjustments for royalty payments.
6. Disallowance of provision for obsolete inventory.

Detailed Analysis:

1. Maintainability of the Appeal Before the Tribunal:
The Departmental Representative initially raised a preliminary objection regarding the maintainability of the appeals, arguing that the appeal should have been filed before the Dispute Resolution Panel (DRP) or the Commissioner of Income Tax (Appeals) [CIT(A)]. However, the Tribunal decided to proceed with the appeals on merits after the Departmental Representative withdrew his objection.

2. Selection of the Tested Party for Transfer Pricing:
The Tribunal had previously directed the Transfer Pricing Officer (TPO) to adopt GM-DAT, Korea, as the tested party. The TPO, however, expressed his inability to comply due to alleged non-cooperation and insufficient data from the assessee. Upon review, the Tribunal found that the assessee had indeed provided the necessary data, including certified segmental data from statutory auditors. The Tribunal held that the TPO's refusal to adopt GM-DAT as the tested party was unjustified and that the TPO's new arguments were not permissible at this stage.

3. ALP Adjustments for CKD Kits:
The TPO initially made an ALP adjustment of ?33.49 crores for the assessment year 2006-07 and ?237.73 crores for the assessment year 2007-08. The Tribunal found that the TPO had not pointed out any legally sustainable defects in the transfer pricing analysis provided by the assessee. The Tribunal held that the TPO's fresh search for comparables and new arguments were not permissible. Consequently, the ALP adjustments for CKD kits were deleted.

4. ALP Adjustments for Tech Centre Operations:
The TPO reiterated his earlier stand without adequately addressing the assessee's objections. The Tribunal found merit in the assessee's plea regarding the inclusion and exclusion of specific comparables. The Tribunal directed the TPO to include ACE Software Exports, exclude Powersoft Global Solutions Ltd and Roltas India Ltd, and include PSI Data Systems Ltd. The matter was remitted to the TPO for limited verification to ensure that the margins of the Tech Centre are within the ALP margins.

5. ALP Adjustments for Royalty Payments:
The TPO made an ALP adjustment of ?4.89 crores for the assessment year 2007-08, using an external comparable. The Tribunal noted that the assessee did not provide sufficient arguments against the external comparable. The Tribunal upheld the TPO's adjustment, stating that the external comparable was valid and the assessee had not demonstrated why it should not be adopted.

6. Disallowance of Provision for Obsolete Inventory:
For the assessment year 2006-07, the Assessing Officer allowed a provision of ?2,50,68,560 for slow-moving stock but disallowed ?8,02,194, estimating the market value at 3.2%. The Tribunal directed that if the assessee can demonstrate that this residual value was considered in the provision, the disallowance should be deleted. For the assessment year 2007-08, a similar disallowance of ?7,81,722 was remitted to the Assessing Officer with the same directions.

Conclusion:
The appeals were partly allowed, with significant relief granted to the assessee on the ALP adjustments for CKD kits and Tech Centre operations. The ALP adjustment for royalty payments was upheld, and the disallowance of provision for obsolete inventory was remitted to the Assessing Officer for verification.

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