2015 (12) TMI 357 - AT - Income Tax

Validity of service of notice u/s 143(2) - Whether notice was not within the limitation period? - Held that - This case, the notice was admittedly issued by the AO within the prescribed period of 12 months from the end of the month in which the return was filed by the assessee, which fact has been confirmed by the Postal Authorities as well, the ld. DR contended that it should be considered as duly served on the assessee within the meaning of proviso to section 143(2). Albeit, this contention was earlier resisted, but during the course of hearing, the ld. AR did not oppose this argument advanced on behalf of the Revenue. He candidly, admitted that this issue may be decided in favour of the Revenue. Without going into the legal aspects of the arguments on this issue, we allow this ground of appeal on the concession made by the ld. AR. - Decided againt assessee. Addition on account of transfer pricing adjustment - application of the most appropriate method to the international transactions - CIT(A) deleted the addition - Held that - Application of the CUP as the most appropriate method becomes more imminent in a case where comparable uncontrolled transactions are internal. Adverting to the facts of the instant case, we find that the assessee itself admitted before the AO that the services provided to the AEs and non-AEs are similar. Since the internally uncontrolled comparable transactions of rendering similar services as provided to the AEs are available, we hold that the decision of the AO to apply CUP as the most appropriate method does not warrant any interference. We, therefore, approve the view taken by the AO in determining the ALP of the international transaction of Service revenue from its AE on the basis of CUP method as against TNMM applied by the assessee. Here, it is pertinent to mention that the AO has confined himself only to the determination of ALP in respect of Service revenue by impliedly accepting the international transaction of Equipment supply revenue at ALP. Out of seven invoices raised on India Glycols Ltd., three invoices for ₹ 24,000/- each represent Site visit to M/s India Glycols Ltd., for discussions about the work undertaken to be done by the assessee for them. These invoices represent site visiting charges by the assessee s employees for which there is a charge of ₹ 24,000/-, which rate on hourly basis, comes to ₹ 1,500/-. In so far as the rendering of actual service is concerned, the invoices are for sum of ₹ 2,80,000/-, ₹ 2lac, ₹ 1,22,000/- and ₹ 90,000/- on India Glycols Ltd., and ₹ 44,550/- on M/s Petron Engineering Construction Ltd. These five invoices represent service charges for the actual work done by the assessee to these unrelated parties. The AO has ignored these five invoices and picked up only three invoices of ₹ 24,000/- each for determining the benchmark rate of ₹ 1,500/- per hour, which, in fact, represented merely site visiting charges undertaken by the assessee s employees. If all the eight invoices are considered, the average hourly rate comes to ₹ 717/- per hour which was placed before the AO, who chose to ignore the same. If we ignore the three invoices of ₹ 24,000/- each from both the sides, namely, revenue as well as the number of hours, the average hourly rate charged comes to ₹ 682/-. Viewed from any angle, the price charged by the assessee from its AEs at ₹ 1135/- per hour is definitely at arm s length in comparison with the average price of ₹ 717/- or ₹ 682/-, as the case may be. In view of the foregoing discussion, we are of the considered opinion that the ld. CIT(A) was justified in deleting the addition on merits - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of service of notice under section 143(2) of the Income-tax Act, 1961.
2. Determination of the arm's length price (ALP) for international transactions involving transfer pricing adjustments.

Issue-wise Detailed Analysis:

1. Validity of Service of Notice under Section 143(2):

The Revenue challenged the decision of the CIT(A) that the service of notice under section 143(2) was not within the limitation period. The assessee filed its return on 31.10.2005, and the first notice under section 143(2) was issued on 27.10.2006. The notice could not be delivered as the assessee had shifted addresses without informing the AO. Subsequent notices were also returned undelivered. Eventually, a notice served on 10.7.2007 at the new address was acknowledged. The CIT(A) held that no valid notice was served within the prescribed time limit, rendering the assessment invalid.

The Tribunal considered the argument that the term "served" in the proviso to section 143(2) should be interpreted as "issued," referencing the Punjab & Haryana High Court's decision in V.R.A. Cotton Mills Pvt. Ltd. The Tribunal noted that the notice was issued within the 12-month period from the return filing date, and the Postal Authorities confirmed this. The assessee's representative conceded this point during the hearing. Consequently, the Tribunal allowed this ground of appeal in favor of the Revenue based on the concession made by the assessee's representative.

2. Determination of Arm's Length Price (ALP) for International Transactions:

The second issue involved the deletion of an addition on account of transfer pricing adjustment. The assessee, a company incorporated in the Netherlands, reported international transactions of rendering services and equipment supply to its associated enterprises (AEs). The assessee used the Transactional Net Margin Method (TNMM) to justify that its international transactions were at ALP, showing an operating profit margin of 10.81% from international transactions against a loss from unrelated transactions.

The AO rejected the TNMM method, opting for the Comparable Uncontrolled Price (CUP) method, comparing the hourly rate charged to AEs (Rs. 1,135) with that charged to non-AEs (Rs. 1,500). The assessee contended that the correct average hourly rate from unrelated parties was Rs. 717. The AO, however, made an addition based on the higher rate of Rs. 1,500. The CIT(A) agreed with the assessee's average rate calculation and deleted the addition.

The Tribunal upheld the AO's choice of the CUP method over TNMM, given the availability of comparable uncontrolled transactions. The Tribunal emphasized that in cases with multiple comparable uncontrolled transactions, the arithmetic mean of the prices should be used, as per section 92C of the Act. The AO had cherry-picked invoices representing higher rates, ignoring others. The correct average hourly rate, considering all invoices, was Rs. 717 or Rs. 682, both of which were lower than the rate charged to AEs (Rs. 1,135). Thus, the Tribunal affirmed the CIT(A)'s decision to delete the addition, finding the rate charged to AEs at arm's length.

Conclusion:

The Tribunal allowed the Revenue's appeal regarding the service of notice under section 143(2) based on the concession by the assessee's representative. However, it upheld the CIT(A)'s decision on the transfer pricing adjustment, confirming that the rate charged to AEs was at arm's length. The appeal was partly allowed.