2016 (9) TMI 148 - AT - Income Tax

Transfer pricing adjustment - MAM - Held that - CUP method provides the most direct comparison for the purpose of determining the arm s length price of international transactions and is to be preferred over the other profit based methods. Accordingly in the instant case internal CUP method should be preferred over the external CUP method. Hence, we hold that in the instant case, the CUP Method (internal) is the most appropriate method in determining the arm s length price of the international transaction involving export of PCBs by the assessee to AE and accordingly, delete the adjustment made in the assessment order. Disallowance on account of diminution in the value of inventories - Held that - In the instant case, the assessee inadvertently added back the negative balance of the opening and closing provisions made for diminution in the value of inventories in the return filed which should have otherwise reduced from the total income of the appellant. Later on, realizing the inadvertent mistake, the assessee filed a written submission before the AO dated 2nd March, 2015 praying before the AO to allow the deduction of the excess provision which was inadvertently added back. The same was turned down by the Assessing Officer on the alleged ground that the same could only be rectified by a revised return and as the appellant has not filed the revised return the same could not be entertained even after accepting the fact that the appellant should have been allowed with the claim. Now the question before us arises whether the deduction can be allowed without filing the revised return. We are inclined to reverse the order of authorities below and delete the disallowance made by the Assessing Officer / DRP amounting in respect of the negative provisions for diminution in the value of inventories.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Corporate Tax (Other Than Transfer Pricing)

Issue-Wise Detailed Analysis:

1. Transfer Pricing Adjustment:

Grounds 1 & 2:
The first issue concerns the adjustment of ?69,30,53,397/- to the total income of the assessee by using the Transactional Net Margin Method (TNMM) instead of the Comparable Uncontrolled Price (CUP) Method as suggested by the assessee. The assessee, a manufacturer of Printed Circuit Boards (PCBs), is a subsidiary of AT&S AG, Austria. The Transfer Pricing Officer (TPO) rejected the assessee's selection of the Associated Enterprise (AE) as the tested party and instead selected the assessee as the tested party. The TPO applied TNMM and identified comparables, resulting in an upward adjustment. The Dispute Resolution Panel (DRP) upheld the TPO's approach, stating that the assessee is more akin to a contract manufacturer. The Tribunal, however, found that the CUP method is more appropriate, as the prices at which the PCBs were sold to the AE matched the prices at which the AE sold to independent customers. The Tribunal emphasized that the CUP method provides the most direct comparison and is preferred over profit-based methods like TNMM.

Grounds 3 to 5:
The Tribunal did not adjudicate these grounds as the primary issue regarding the determination of ALP was resolved in favor of the assessee by applying the CUP method.

2. Corporate Tax (Other Than Transfer Pricing):

Grounds 6 & 7:
The second issue pertains to the disallowance of ?7,53,519/- on account of diminution in the value of inventories. The assessee had inadvertently added back this amount in the computation of income, which should have been deducted. The AO rejected the claim, stating that the assessee did not file a revised return. The DRP upheld the AO's decision. The Tribunal, however, relied on judicial precedents, including the Hon'ble Calcutta High Court and the Hon'ble Supreme Court, which allow rectification of such mistakes without the need for a revised return. The Tribunal directed the deletion of the disallowance.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the deletion of the transfer pricing adjustment of ?69,30,53,397/- by applying the CUP method and also deleted the disallowance of ?7,53,519/- related to the diminution in the value of inventories.