2021 (8) TMI 1361 - AT - Income Tax

TP adjustment - MAM selection - determination of ALP in respect of the international transaction of purchase of stock - in- trade by the Assessee from its AE - assessee aggregated and benchmarked the transactions of purchase of consumables, raw materials, stock-in-trade and capital assets by selecting Cost Plus Method (CPM) as Most Appropriate Method ( MAM') and the overseas AE as tested party - Assessee submitted that the TPO ought not to have rejected the claim of the Assessee that RPM was the MAM for determination of ALP - HELD THAT - A method for determining arm s length price, to be held as a most appropriate method (MAM), should be, as provided in rule 10C(1). A method which is best suited to the facts and circumstances of each particular transaction and a method and which provides the most reliable measure of arm s length price of the international transaction Under rule 10C(2)(c), the availability, coverage and reliability of data necessary for application of the method is one of the crucial factors determining suitability of a method of determination of arm s length price in a particular fact situation. Similarly, it is also important to determine whether accurate adjustments can be made for the differences between the international transactions and the comparable uncontrolled transactions, and unless such adjustments can be made the related method cannot be said to be most appropriate method. Determination of ALP on the basis of facts and circumstances and as per the requirements of the relevant statutory provision is mandatory and cannot be accepted owing to default. We therefore set aside the order of the AO/TPO on the issue and the directions of the DRP on the issue and remand the issue to the DRP for passing a speaking order after meeting the specific objections raised by the Assessee. The relevant grounds of appeal being Gr.No.1 to 12 are accordingly treated as allowed for statistical purpose. Disallowance of reimbursement of expenses by invoking the provisions of Sec.40(a)(ia) - submission of the Assessee on the aforesaid disallowance was that the reimbursements were purely on a cost to cost basis and there was no margin whatsoever and therefore there was no question of deduction of tax at source on such reimbursements - HELD THAT - We are of the view that the DRP fell into an error in refusing to examine the plea of the assessee that the sum paid were mere reimbursement with no element of income by following the decision of Transmission Corporation AP Ltd. 1999 (8) TMI 2 - SUPREME COURT . The said decision has been explained in a later decision in the case of GE Technologies 1999 (8) TMI 2 - SUPREME COURT and in terms of the said judgment the chargeability of the sum paid in the hands of the recipient has to be gone into. If the payments were mere reimbursement, then there would not no income chargeable in the hands of the recipient and hence no requirement of deduction of tax at source. Since this exercise is required to be carried out by the DRP, we deem it proper to remit this issue also to the DRP. Admission of additional ground - Assessing Officer computing total income without adjusting the declared loss - HELD THAT - Additional grounds of appeal raise questions of law, which can be decided on the basis of material available on record. The omission to raise the aforesaid grounds of appeal is bonafide. In view of the decision of the Hon'ble Supreme Court in the case of National Thermal Power Co Ltd 1996 (12) TMI 7 - SUPREME COURT and Jute Corporation of India 1990 (9) TMI 6 - SUPREME COURT and the discretion vested in your Honours under Rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963, the additional grounds of appeal is admitted for adjudicated on merits. Merits of the claim made in the additional ground is concerned, the issue requires examination by the AO when he gives effect to the order. Ends of justice will be met, if the AO is directed to consider the claim of the assessee and if found correct give appropriate adjustment to the total income.

Issues Involved:
1. Addition to total income due to Arm's Length Price (ALP) determination.
2. Rejection of Transfer Pricing (TP) study and selection of the tested party.
3. Adoption of Comparable Uncontrolled Price Method (CUPM) as the Most Appropriate Method (MAM).
4. Computation method of ALP.
5. Disallowance of reimbursement of expenses under Sec. 40(a)(ia).
6. Non-adjustment of declared loss in computing total income.

Detailed Analysis:

1. Addition to Total Income Due to Arm's Length Price (ALP) Determination:
The first issue concerns the addition of Rs. 21,61,37,271 to the assessee's total income due to ALP determination under Section 92 of the Income Tax Act, 1961. The assessee, a subsidiary of Shindengen Electric Mfg Co., Ltd, Japan, engaged in trading power system products and electrical components, entered into international transactions with its Associated Enterprise (AE). The dispute revolves around the ALP determination for the purchase of stock-in-trade from the AE, which the Transfer Pricing Officer (TPO) benchmarked using the Comparable Uncontrolled Price Method (CUPM), leading to the addition.

2. Rejection of Transfer Pricing (TP) Study and Selection of the Tested Party:
The TPO rejected the assessee's TP study, which used the Cost Plus Method (CPM) and selected the foreign AE as the tested party. The TPO argued that the assessee was the simpler party with lesser risks and had reliable data for comparables, thus should be the tested party. The DRP upheld the TPO's rejection without providing detailed reasons or addressing the assessee's objections regarding the selection of the tested party.

3. Adoption of Comparable Uncontrolled Price Method (CUPM) as the Most Appropriate Method (MAM):
The TPO proposed and adopted CUPM, comparing the prices of stock-in-trade purchased by the assessee with the prices at which they were sold to third parties. The assessee contended that CUPM was incorrectly applied as it did not involve comparable uncontrolled transactions. The DRP did not address the objections regarding the adoption of CUPM as the MAM.

4. Computation Method of ALP:
The TPO computed the ALP by comparing the average purchase and sale prices of products and applying gross margins to determine the ALP, effectively using a distorted version of the Resale Price Method (RPM). The assessee argued that this approach violated the principles of CUPM and RPM, as it did not involve any comparable uncontrolled transactions. The DRP's order lacked detailed reasoning and failed to address these objections.

5. Disallowance of Reimbursement of Expenses under Sec. 40(a)(ia):
The assessee challenged the disallowance of Rs. 20,81,884 as reimbursement of expenses, arguing that these were purely cost-to-cost reimbursements with no income element, thus not subject to tax deduction at source. The DRP upheld the disallowance based on the Supreme Court's decision in Transmission Corporation of AP Ltd., which the assessee argued was explained in a later decision (GE Technologies) to not require tax deduction for non-taxable reimbursements.

6. Non-Adjustment of Declared Loss in Computing Total Income:
The assessee raised an additional ground regarding the non-adjustment of the declared loss of Rs. 3,58,98,221 in the computation of total income. The AO determined the total income without adjusting this declared loss, leading to the additional ground of appeal. The Tribunal admitted this ground for adjudication and directed the AO to consider the claim and make appropriate adjustments.

Conclusion:
The Tribunal remanded the issues back to the Dispute Resolution Panel (DRP) for fresh consideration, emphasizing the need for a speaking order addressing the specific objections raised by the assessee. The Tribunal also directed the AO to examine the claim regarding the non-adjustment of declared loss and make necessary adjustments. The appeal was treated as allowed for statistical purposes.

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