2013 (11) TMI 1262 - AT - Income Tax

Upward Addition Made u/s 92CA(3) of Income Tax Act, 1961 Adjustment in Export price of Spools - Held that - Associate Enterprises had allowed assessee company to use spools collected from Associate Enterprise customers for packaging assessee s company s own manufacturing product for which no charge was levied by Associate Enterprise - Export of spools was secondary and ancillary activity of the assessee company - Assessee company was not the owner of the spools exported - assessee company was justified in exporting spools with 10% markup - Accordingly, sustaining addition made in respect of export of spools u/s.92CA(3) of the Act was not justified and to be deleted - appeal filed by the assessee was allowed. The assessee had not involved in the process in an activity which was separate from the regular activity - There was nothing on record to suggest that huge activities involving cost would be involved - In the initial years the assessee had lesser requirement of these spools as the business was in the process of being established and stabilized - The system of collecting these spools also had to be put in place and stabilized to ensure its supply on a sustained basis - The system adopted by the TPO to allocate indirect expenses on the basis of turnover in initial assessment years was not justified - There was nothing on record to suggest any indirect expenses for determining the ALP of export of spools - However, no such adjustments were made by the TPO in A.Y. 2004-05 - Accordingly, the CIT(A) was not justified in restricting the addition as there was no element of indirect cost involved. Addition on the basis of Report of TPO Import of Dies Held that - The goods being manufactured by the assessee company were an import substitution and therefore, foreign group companies do supply similar products to the Indian consumers - As the spools were reusable and had no utility to the buyers, as a measure to benefit local group companies, wherever possible, were involved in collection of empty spools for free from buyers for the packaging of their own products and its export in case the same are in excess of their requirement - spools have a consierable value and therefore the arrangement by which the assessee company gets the same free by only making expenses relating to cost of collection, was beneficial to the business of the assessee - the collection of spools, was incidental but for the purpose of the business - Decided in favour of Assessee.

Summary

Issues Involved:
1. Adjustment in export price of spools.
2. Addition related to import of dies.
3. Upward adjustment to Arm's Length Price (ALP) for various assessment years.

Detailed Analysis:

Adjustment in Export Price of Spools:

The primary issue concerns the adjustment in the export price of spools. The Assessing Officer added Rs. 50,32,752/- based on the Transfer Pricing Officer's (TPO) order, which suggested adjustments for the export of spools and import of dies. The spools, used for packaging steel tyre cords, are reusable and were exported by the assessee to various group companies at cost plus a 10% markup. The TPO included 25% of indirect costs in determining the Arm's Length Price (ALP), which the assessee contested, arguing that the spools were obtained free of cost and only excess spools were exported.

The First Appellate Authority (CIT(A)) found the TPO's method of allocating indirect expenses based on turnover incorrect, especially since the business was still stabilizing. The CIT(A) adopted the method used by the TPO in A.Y. 2004-05, which considered the entire economic activity for allocating expenses, reducing the addition to Rs. 5,07,651/-. However, the Tribunal found no justification for any indirect cost allocation for the export of spools and ruled that the CIT(A) was not justified in restricting the addition to Rs. 5,07,651/-.

Addition Related to Import of Dies:

The second issue involves an addition of Rs. 70,676/- for the import of dies from China Bekaert Steel Cord Co. The TPO found that the margin applied on the cost of dies was inconsistent with the Chinese company's stated policy. The CIT(A) upheld the TPO's adjustment, finding it aligned with established Transfer Pricing principles. The Tribunal agreed with the CIT(A) and upheld the addition.

Upward Adjustment to ALP for Various Assessment Years:

For A.Y. 2003-04, the Assessing Officer made an addition of Rs. 62,83,591/- for the export of spools, which the CIT(A) reduced to Rs. 5,20,372/-. The Tribunal, following the reasoning for A.Y. 2002-03, ruled that the CIT(A) was not justified in restricting the addition and directed the Assessing Officer accordingly.

For A.Y. 2004-05, the Assessing Officer made an addition of Rs. 1,04,55,037/-, which the CIT(A) reduced to Rs. 5,67,248/-. The assessee appealed, arguing that the CIT(A) erred in attributing indirect expenses to the export of spools. The Tribunal found that the assessee was justified in exporting spools with a 10% markup and directed the deletion of the Rs. 5,67,248/- addition.

Conclusion:

The Tribunal dismissed the Revenue's appeals for A.Y. 2002-03 and 2003-04, partly allowed the assessee's appeal for A.Y. 2002-03, and fully allowed the assessee's appeals for A.Y. 2003-04 and 2004-05.