2016 (9) TMI 1649 - AT - Income Tax

TP Adjustment - Disallowance of pre-commencement expenditure - admission of the additional evidence - Whether APA Advance Pricing Agreement was crucial in determining the ALP of the international transactions of the assessee?- HELD THAT - APA has considerable bearing for the years under appeal, since prima facie, the rollback of four years which went to assessment year 2011- 12, was curtailed to three years. Obviously, the curtailment was allowed in the APA after considering the submissions of the assessee that it had become a contract manufacturer only in financial year 2010-11 pursuant to labour upheaval. Ld TPO in the orders for all the impugned assessment years had considered assessee to be a contract manufacturer and in his order for assessment year 2009-10, this is specifically mentioned at page 69 of the order. Nature of business of the assessee would have considerable bearing on the Arm s Length Pricing study of the international transactions with its AEs. APA having been signed on 24.5.2016, assessee had no occasion to produce it before lower authorities. We are, therefore, of the opinion that the additional evidence has to be admitted. We, therefore, admit the additional evidence, set aside the orders of the lower authorities and remit all the issues back to the AO/TPO for consideration afresh in accordance with law. Appeals of the assessee for all the years are allowed for statistical purposes.

Summary

Issues:
Assessment of transfer pricing adjustments and pre-commencement expenditure disallowance.

Transfer Pricing Adjustments:
The appeals were against assessment orders for three consecutive years, challenging transfer pricing adjustments and disallowance of pre-commencement expenditure. The appellant contended that the disallowance was connected to transfer pricing issues. Additional evidence in the form of an Advance Pricing Agreement (APA) was sought to be admitted, indicating that the appellant became a contract manufacturer only after labor strikes in the financial year 2010-11. The APA was crucial in determining the Arm's Length Pricing (ALP) of international transactions with Associated Enterprises (AEs). The Tribunal observed that the APA had a significant impact on the assessment years, as it limited the rollback period to three years, contrary to the mandatory four-year requirement. The Tribunal admitted the additional evidence, set aside the lower authorities' orders, and remitted the issues back for reconsideration.

Pre-Commencement Expenditure Disallowance:
Apart from transfer pricing issues, a solitary ground challenged the disallowance of pre-commencement expenditure for one of the assessment years. The appellant argued that this ground was intrinsically linked to the transfer pricing matters. The appellant sought admission of additional evidence related to an APA, emphasizing its impact on transfer pricing issues. The Tribunal acknowledged the fundamental connection between the pre-commencement expenditure disallowance and transfer pricing adjustments, leading to the admission of additional evidence and the subsequent remittance of all issues for fresh consideration.

Conclusion:
The Tribunal allowed the appeals for statistical purposes, highlighting the importance of the APA in determining the ALP of international transactions and the impact of the appellant's business nature on transfer pricing assessments. The decision to admit additional evidence and remit the issues back for reconsideration underscored the significance of the APA in resolving the transfer pricing disputes for the relevant assessment years.