2011 (1) TMI 108 - AT - Income Tax

Arm s length price Addition of income - The appellant company is engaged in the business of production and sale of iron ore pellets - The assessee had entered into two types of international transactions viz., Commission payments and Sales to its Associated Enterprise (AE) located abroad - The assessing officer referred the matter of determination of Arms Length Price (ALP) in respect of these International transactions to the Transfer Pricing Officer (TPO) in accordance with sec. 92CA of the Act TPO has made addition in the income as regard to sale to associated enterprises - The Assessing Officer shall not make any adjustment to the arm s length price determined by the taxpayer, if such price is unto 5% less or unto 5%more than the price determined by the Assessing Officer. In such cases the price declared by the taxpayer may be accepted In this case difference works out to only 1.6% which is within the permissible range of /- 5% as prescribed by the CBDT - The proviso to section 92C(2), Provided that where more than one price may be determined by the most appropriate method, the arm s length price shall be taken to be the arithmetical mean of such prices - In the instant case, only one price has been determined under Most appropriate method - the question of application of the proviso does not arise - Accordingly, we hold that the assessee is not entitled to the concession, as prescribed in the proviso to sec. 92C(2) Appeal is allowed

Summary

Issues Involved:
1. Addition made under Section 92C of the Income Tax Act on the basis of Arm's Length Price (ALP) determined by the Transfer Pricing Officer (TPO).
2. Addition pertaining to "Provision for bad and doubtful debts and doubtful advances" while computing book profit under Section 115JB of the Income Tax Act.

Detailed Analysis:

Issue 1: Addition under Section 92C - Arm's Length Price (ALP)

Facts:
The appellant company, engaged in the production and sale of iron ore pellets, had entered into international transactions involving commission payments and sales to its Associated Enterprise (AE). The TPO determined the ALP of the sales transactions at Rs. 67,20,03,342/- compared to the sales value of Rs. 66,08,35,225/- declared by the assessee, resulting in an addition of Rs. 1,11,68,115/-. The assessee argued that the variation was within 5% as per CBDT Circular No.12 dated 23.8.2001, and thus no adjustment was necessary.

Tribunal's Findings:
The Tribunal examined whether the CBDT Circular No.12 dated 23.8.2001 could override the amended proviso to Section 92C(2) introduced by the Finance Act 2002. The Tribunal noted that the amended proviso, which allows a 5% concession only if more than one price is determined by the most appropriate method, was applicable from the assessment year 2002-03 onwards. The Tribunal concluded that the circular issued for explaining provisions that never came into operation could not be relied upon. Hence, the assessee was not entitled to the 5% concession, and the addition made by the assessing officer was upheld.

Conclusion:
The Tribunal reversed the order of the CIT(A) and restored the addition made by the assessing officer under Section 92C of the Income Tax Act.

Issue 2: Addition under Section 115JB - Provision for Bad and Doubtful Debts

Facts:
The assessee did not add Rs. 18,04,599/- debited under "Provisions made for doubtful debts and doubtful advances" to the book profit, arguing it was not an ascertained liability. The assessing officer added this amount to the book profit, which was deleted by the CIT(A).

Tribunal's Findings:
The Tribunal noted that after the insertion of clause (i) in Explanation 1 to Section 115JB by the Finance (No.2) Act, 2009 with retrospective effect, provisions for diminution in the value of any asset must be included in the book profit. Both parties agreed that the assessing officer had not examined the issue as per the amended law.

Conclusion:
The Tribunal set aside the order of the CIT(A) and remanded the issue back to the assessing officer for re-examination in light of the amended law, ensuring the assessee is given an opportunity to be heard.

Summary:
The Tribunal upheld the addition of Rs. 1,11,68,115/- under Section 92C, rejecting the reliance on CBDT Circular No.12 due to the overriding amended proviso to Section 92C(2). The issue regarding the provision for bad and doubtful debts under Section 115JB was remanded back to the assessing officer for re-examination in accordance with the retrospective amendment. The appeal of the revenue was treated as allowed for statistical purposes.