2015 (10) TMI 2049 - AT - Income Tax

Disallowance of R that is Resale Price Method and instead by adopting TNMM as MAM by the TPO. This selection of most appropriate method of TNMM by the department has been found to be inappropriate by the Tribunal in the earlier years and assessee s RPM has been accepted. As a result of adopting RPM as MAM similar adjustments made in the earlier assessment years stands deleted. Thus as a matter of judicial precedence and without there being any change of material facts and circumstances we also direct the TPO/Assessing Officer to adopt RPM as most appropriate method for benchmarking the transaction of import of seeds to its AE and carry out comparability analysis for benchmarking the assessee s gross margin and determined the appropriate ALP. Addition on account of fall in gross profit margin - Held that - there are exceptional items in this year like inventory written off aggregating to Rs. 16, 36, 68, 410/- and extra ordinary increase in sales expenses at Rs. 6, 12, 55, 579/-. If these two factors are taken into account then the difference/gap between the GP of the preceding year and the current year would be very low. In such a situation the addition made by the Assessing Officer will also scale down substantially. However in wake of letter given by the assessee before the DRP agreeing for the GP addition we are restraining ourselves to give any finding on merits and sustain whole of the GP addition as accepted by the assessee before the DRP. To this extent we agree with the contention of the Ld. DR that if the TP adjustments are deleted then there would be no telescoping and the entire addition made on account of fall in gross margin will get sustained. Accordingly we direct the Assessing Officer that in case the TP adjustments are deleted after adopting the RPM as MAM then the entire GP addition should be sustained.

Issues Involved:
1. Rejection of books of account and best judgment assessment under Section 144.
2. Disallowance of R&D expenses on product adaptability and demonstration.
3. Non-granting of depreciation on compensation treated as capital expenditure.
4. Transfer pricing adjustment on international transaction of import of seeds.
5. Addition on account of fall in gross profit margin.

Detailed Analysis:

1. Rejection of Books of Account and Best Judgment Assessment under Section 144:
The assessee challenged the rejection of its books of account and the resultant best judgment assessment made under Section 144 of the Income Tax Act. The Assessing Officer (AO) had rejected the books of account due to discrepancies in trading results and other factors. However, the tribunal did not provide a detailed separate analysis for this issue in the judgment, implying that the focus was more on the specific disallowances and adjustments contested by the assessee.

2. Disallowance of R&D Expenses on Product Adaptability and Demonstration:
The assessee argued that the disallowance of Rs. 74,40,373/- for R&D expenses was incorrect, as similar expenses had been allowed in previous years. The tribunal noted that these expenses were recurring and essential for the assessee's business. The tribunal directed the AO to allow the expenses under Section 35 after verification, referencing past tribunal decisions that had favored the assessee. The tribunal emphasized that R&D expenses are continuous and necessary for the business, thus should be allowed.

3. Non-Granting of Depreciation on Compensation Treated as Capital Expenditure:
The tribunal addressed the issue of non-granting depreciation on Rs. 74,85,711/- paid as compensation to "Ceekay Seeds" for termination of an agreement. The AO treated this as capital expenditure and disallowed the claim for revenue expenditure. The DRP upheld this but allowed depreciation on Rs. 55,00,004/-. The tribunal found inconsistency in the DRP's direction to disallow Rs. 19,85,707/- under Section 40(a)(ia), as this provision applies only to revenue expenditure. The tribunal held that depreciation should be allowed on the entire amount of Rs. 74,85,711/- as capital expenditure.

4. Transfer Pricing Adjustment on International Transaction of Import of Seeds:
The assessee contested the transfer pricing adjustment of Rs. 15,40,31,031/- made by the AO/TPO. The tribunal noted that the AO/TPO had rejected the Resale Price Method (RPM) used by the assessee and instead applied the Transactional Net Margin Method (TNMM). The tribunal referenced prior decisions where RPM was accepted as the most appropriate method for similar transactions in earlier years. The tribunal directed the AO/TPO to adopt RPM and carry out a comparability analysis accordingly, implying that the adjustment should be reconsidered using RPM.

5. Addition on Account of Fall in Gross Profit Margin:
The AO made a significant addition due to a fall in the gross profit margin, comparing the current year's GP margin of 2.40% with the previous year's 46.74%. The assessee attributed the fall to extraordinary items like inventory write-off and increased sales expenses. The tribunal acknowledged these factors and noted that if these were considered, the GP difference would be minimal. However, due to the assessee's letter to the DRP agreeing to the addition if TP adjustments were made, the tribunal sustained the GP addition. The tribunal directed that if TP adjustments were deleted, the entire GP addition should be sustained.

Conclusion:
The tribunal allowed the appeal partly, directing the AO to reconsider the disallowance of R&D expenses and depreciation on compensation, and to adopt RPM for transfer pricing adjustments. The GP addition was sustained based on the assessee's agreement before the DRP, contingent on the outcome of the TP adjustment reconsideration.

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