2015 (6) TMI 243 - AT - Income Tax

Transfer pricing adjustment - CIT(A) deleting the addition made on account of adjustment of arm s length price - Held that - The assessee in this case has created a provision for obsolete stocks. Admittedly, such the provision for obsolesce stock has not been made by any of the companies, which are taken as comparables as per the TPO s order, except for Kirsolkar Oil Engines Ltd. where the provision for stock obsolesce / non moving inventory is only 1.03% of sales as against the provision for stock obsolesce or non moving inventory made by the assessee at 8.98%. There is no dispute that such a provision for stock obsolesce and non moving inventory is an extraordinary time. Ld. CIT(A), has rightly made suitable adjustments by eliminating the said provision from the financial statements of the assessee and thereafter arriving at the operation margin for the purpose of comparability and benchmarking with the other comparables companies. Thus no infirmity in the well reasoned order passed by the Ld. CIT(A) on the issue in dispute - Decided against revenue.

Summary

Issues involved:
Appeal against deletion of addition of arm's length price adjustment.

Analysis:
1. The appeal was against the deletion of an addition of Rs. 1,87,53,644 made on account of adjustment of arm's length price for the assessment year 2003-04. The appellant argued that the Commissioner of Income Tax (Appeals) erred in deleting this addition.
2. The assessee, a subsidiary of a foreign company, was engaged in the automobile ancillary business. The company imported raw materials, semi-finished goods, and finished goods from its associated enterprises. The return of income declared a NIL income after adjustments. The assessment order made various adjustments related to transfer pricing and corporate tax.
3. The assessee appealed to the Ld. CIT(A) against the assessment order, and the appeal was partly allowed. The Revenue then appealed to the Tribunal against the order of the Ld. CIT(A).
4. The Tribunal analyzed the provision for stock obsolescence/non-moving inventory made by the assessee compared to similar provisions by comparable companies. The Tribunal found that the provision made by the assessee was significantly higher than that of the comparables, except for one company. The Tribunal concluded that the provision was abnormal and extraordinary and needed to be excluded for computing operating margins.
5. The Ld. CIT(A) rightly eliminated the provision for stock obsolescence/non-moving inventory from the financial statements of the assessee to ensure comparability with other companies. The Tribunal upheld the order of the Ld. CIT(A) based on the principle of treating both the tested party and comparables equally in transfer pricing analysis.
6. Relying on precedent and the principle of making suitable adjustments for comparability when extraordinary items are present in comparables, the Tribunal dismissed the appeal filed by the Revenue. The well-reasoned order of the Ld. CIT(A) was upheld, and the Revenue's appeal was dismissed.

This detailed analysis covers the issues involved in the legal judgment, providing a comprehensive overview of the case and the Tribunal's decision regarding the arm's length price adjustment.