2020 (10) TMI 504 - AT - Income Tax

Adjustment to arm s length price of trading segment - adjustment made to trading in industrial chemicals - restrict the adjustment to the transaction with the Associated Enterprises (AE) only - TPO rejected both internal TNMM as well as RPM applied by the assessee - AO proceeded to determine the arm s length price under TNMM by short listing external comparables - HELD THAT - Observations of learned DRP do not reflect the correct factual position. The legal principle is fairly well settled that if internal comparables are available, then they have to be preferred over external comparables. Therefore, when the assessee has sold products both to AEs and non AEs and audited segmental results of the AE and non A.E. segments are available, then, the net margin earned on non AE transaction can be considered for determining the arm s length price of the transaction with the AE. The decisions relied upon by the learned Counsel for the assessee, referred to above, clearly support this view. Even otherwise also, the contention of the learned Counsel for the assessee that the adjustment, if any, has to be restricted to the AE transaction is acceptable as it is supported by a number of judicial precedents. In view of the aforesaid, the addition made on account of transfer pricing adjustment to the trading in industrial chemical deserves to be deleted. Adjustment made in trading in agro chemicals and public health chemicals - Assessee benchmarked the transaction by applying RPM. Whereas, the Transfer Pricing Officer has benchmarked them by applying TNMM - HELD THAT - It is fairly well settled that in a case of import of goods for resale in domestic market merely as a reseller/distributor, the most appropriate method to benchmark is RPM. Even, a reading of rule 10B(1)(b) makes the aforesaid position clear. The decisions relied upon by the learned Counsel for the assessee also clearly support this view. In contrast, the Department has not brought any material on record to either show that the assessee has made any value addition to the products imported from AEs or establish the nature of such value addition. Prima facie, it appears, RPM has been rejected merely on unsubstantiated allegation. The decisions cited by assessee support this view - in the cited decisions, it has also been held that re packaging and re labeling of goods do not amount to value addition RPM is the most appropriate method to benchmark the transaction. Even, otherwise also, we accept the contention of the assessee that adjustment, if any, has to be restricted to the AE transaction. Adjustment made to the arm s length price of fee paid towards management services - HELD THAT - Assessee has not benchmarked the transaction relating to payment of management and accounting service fee independently, but, has allocated such payment to all the segments. This, in our view, is not a correct approach. The assessee should have benchmarked the aforesaid transaction independently. On the other hand, the TPO has determined the arm s length price at nil purely on ad hoc basis without following any prescribed method. This is also not acceptable, as held in various decisions cited by assessee. Assessee may not be required to prove the benefit derived by it, however, it is required to furnish the basic documentary evidences as well as proper benchmarking to show the arm's length nature of the transaction. Since, the aforesaid exercise has neither been done by the assessee nor by the Transfer Pricing Officer, we are inclined to restore the issue to the Assessing Officer for de novo adjudication after due opportunity of being heard to the assessee. Disallowance of depreciation on goodwill acquired - HELD THAT - We find that this is a recurring issue between the assessee and the Revenue since assessment year 2006 07 onwards. While deciding the issue in earlier assessment years, in the orders referred to above, the Tribunal has allowed assessee s claim of depreciation on goodwill. Respectfully following the aforesaid decisions of the Tribunal, we allow assessee s claim of depreciation. This ground is allowed. Set off of brought forward loss and unabsorbed depreciation as well as proper credit to advance tax and TDS - HELD THAT - Direct the AO to verify assessee s claim and in accordance with law. These grounds are allowed for statistical purposes.

Issues Involved:
1. Adjustment to the arm's length price (ALP) of trading segment.
2. Adjustment to the arm's length price of fee paid towards management services.
3. Disallowance of depreciation on goodwill.
4. Set-off of brought forward business loss and unabsorbed depreciation.
5. Credit for advance tax and TDS.

Detailed Analysis:

1. Adjustment to the Arm's Length Price (ALP) of Trading Segment:
The assessee, engaged in the manufacturing and trading of various chemicals, challenged the addition made by the Assessing Officer (AO) due to adjustment in the ALP of the trading segment. The AO rejected the internal Transactional Net Margin Method (TNMM) and Resale Price Method (RPM) applied by the assessee and used external comparables to determine the ALP, leading to an adjustment of ?9,01,93,565.

The Dispute Resolution Panel (DRP) upheld the AO's decision, stating that internal TNMM was not appropriate due to the controlled nature of transactions and geographical differences. The assessee argued that internal TNMM was the most appropriate method, supported by audited segmental details showing arm's length margins. The Tribunal found the DRP's observations factually incorrect and emphasized that internal comparables should be preferred if available. Consequently, the adjustment made to the trading in industrial chemicals was deleted.

For agro chemicals and public health chemicals, the DRP rejected RPM, claiming value addition by the assessee. However, the Tribunal found no evidence of value addition and held that RPM was the most appropriate method for benchmarking. The Tribunal accepted the contention that any adjustment should be restricted to AE transactions, leading to the deletion of the adjustment.

2. Adjustment to the Arm's Length Price of Fee Paid Towards Management Services:
The Transfer Pricing Officer (TPO) determined the arm's length price of management and accounting services at nil, alleging that the assessee failed to prove the receipt of services. The DRP upheld this decision. The Tribunal found that the assessee did not benchmark the transaction independently and the TPO's determination was ad-hoc. The Tribunal restored the issue to the AO for de novo adjudication, emphasizing the need for proper benchmarking and documentary evidence.

3. Disallowance of Depreciation on Goodwill:
The issue of depreciation on goodwill acquired from Bilag Industries Pvt. Ltd. was a recurring matter. The Tribunal noted that in previous assessment years, the Tribunal had allowed the assessee's claim for depreciation on goodwill. Respectfully following these decisions, the Tribunal allowed the claim for the current assessment year as well.

4. Set-off of Brought Forward Business Loss and Unabsorbed Depreciation:
The assessee challenged the AO's action of not allowing the set-off of brought forward business loss and unabsorbed depreciation. The Tribunal directed the AO to verify the claim and decide the issue based on relevant records and in accordance with the law.

5. Credit for Advance Tax and TDS:
The assessee raised the issue of non-granting credit for advance tax and TDS. The Tribunal directed the AO to verify the claim and grant the credit for advance tax and TDS after verifying the relevant records.

Conclusion:
The Tribunal's judgment addressed multiple issues raised by the assessee, providing detailed analyses and directions for each. The appeal was partly allowed, with specific instructions for the AO to verify and address the claims related to set-off of losses, depreciation, and tax credits. The Tribunal emphasized the importance of proper benchmarking and factual accuracy in transfer pricing adjustments.

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