2022 (11) TMI 198 - AT - Income Tax

Arm s length price adjustment - purchase of greasy wool from its AE by the assessee from its associated enterprise by the assessee - Addition by following internal CUP method as the most appropriate method whereas according to TPO/AO the most appropriate method is TNMM method - HELD THAT - We find that the assessee is engaged in the business of processing raw wool, greasy wool, polyester into wool tops, woolen fabrics etc. during the year - assessee entered into international transactions with its AE and both the international transactions involving import of raw material with AE as well as fabrics to the AE were bench marked by applying internal CUP method. Assessee has reliable data available with regard to the similar transactions with unrelated third parties and thus claimed CUP as the most appropriate method. We note that TPO has rejected the CUP method adopted by the assesse and instead applied external TNMM method after selecting 12 comparables and thus determined the transfer pricing adjustment to arrive at the ALP. CIT(A) held that observations of the TPO s that averaging of cost of purchases was not permissible under CUP method is in contradiction to the provision contained in Section 92C(2) read with Rule 10B(1)(a) of the Income Tax Rules, 1962 wherein it has been explicitly provided that where more than one uncontrolled transactions or prices are available then the ALP shall be the arithmetic mean of such prices. CIT(A) also relied on the decision in the case of JSW Ltd. 2018 (11) TMI 1250 - ITAT DELHI and the decision of Esser Steel Ltd. 2014 (11) TMI 254 - ITAT MUMBAI . We further note that the was having similar transactions with its AE and CUP bench marking analysis done by the assessee under identical facts has been accepted by the TPO in the orders framed u/s 92CA(3) of the Act by accepting the transactions with the AE to be at arms length price and no transfer pricing adjustment was made - we find considerable force in the assesse arguments that once the revenue has accepted accepted the method or proposition in the earlier years , then it is not open to the revenue to take a different in the subsequent years unless there is change in facts or in law. This is in consonance with the ratio raid down in the case of Radhaswami Satsang 1991 (11) TMI 2 - SUPREME COURT - We are of the considered view that the Ld. CIT(A) has passed very reasoned and speaking order and accordingly we uphold the order of Ld. CIT(A)by dismissing the ground nos. 1 to 4 of the revenue. Addition on account of marked to market loss - HELD THAT - We find that loss claimed by the assessee of Rs. 24,06,174/- pertains to loss incurred upon restatement of loan in foreign currency at the year end which was attributable towards working capital. We note that the orders relied by the AO in respect of AYs 2001-02 to 2003-04 passed by his predecessor were reversed by the CIT(A) and loss pertaining to working capital was allowed. CIT(A) has relied on the decision in the case of Woodward Governor Pvt. Ltd. 2009 (4) TMI 4 - SUPREME COURT and ONGC 2010 (3) TMI 81 - SUPREME COURT while allowing the appeal of the assessee. CIT(A), we do not find any infirmity in the order of Ld. CIT(A) and accordingly, the same is affirmed by dismissing the ground no. 5 of the revenue s appeal. Addition from bogus non-existent party - HELD THAT - We find that the assessee has incurred these expenses under the head repair and maintenance for which the payments were made to M/s Prab Brothers Co by account payee cheques. Likewise commission was paid to Rajesh Kapoor for soliciting sales - We note that in respect of both these parties all the necessary material/evidences such as bills vouchers and rate contract etc were placed before the AO as well as Ld. CIT(A) and the payments were made by cheques after proper deduction of TDS and similarly the commission was paid to Rajesh Kapoor with reference to sales effected by him and even invoices were placed on record in respect of which the commission paid to Rajesh Kapoor after deduction of TDS. Considering these facts, we are of the view that the Ld. CIT(A) has rightly allowed the appeal of the assessee. The ground no. 6 of the revenue is dismissed.

Summary

Issues Involved:
1. Deletion of arm's length price adjustment.
2. Appropriateness of the Comparable Uncontrolled Price (CUP) method vs. Transactional Net Margin Method (TNMM).
3. Deletion of addition under the head "Foreign Exchange Fluctuation Loss."
4. Justification of purchases from allegedly bogus non-existent parties.

Detailed Analysis:

1. Deletion of Arm's Length Price Adjustment:
The revenue appealed against the Ld. CIT(A)'s decision to delete the arm's length price adjustment of Rs. 4,75,00,000/- made by the AO/TPO on account of the purchase of greasy wool from the assessee's associated enterprise (AE). The assessee had used the internal CUP method to benchmark the transactions, which the TPO rejected, favoring the TNMM method instead. The Ld. CIT(A) found that the raw materials purchased from external parties were comparable to those from the AE, with minor differences in micron content, which did not materially affect the price. The Ld. CIT(A) held that the TPO's rejection of the CUP method was based on incorrect assumptions and that the internal CUP was the most appropriate method. The Ld. CIT(A) also noted that the TPO had accepted the CUP method in previous assessments, and there was no reason to deviate from it. The Tribunal upheld the Ld. CIT(A)'s decision, dismissing the revenue's grounds.

2. Appropriateness of CUP Method vs. TNMM:
The TPO had rejected the CUP method used by the assessee, arguing that the products purchased from AEs and non-AEs were not identical and that the timing of purchases differed. The Ld. CIT(A) found these objections to be unfounded, noting that the average micron content and prices of purchases from AEs and non-AEs were comparable and fell within the tolerance range of +/-5%. The Ld. CIT(A) also pointed out that the TPO's rejection of averaging under the CUP method contradicted Section 92C(2) of the Act and Rule 10B(1)(a) of the Income Tax Rules, 1962. The Tribunal agreed with the Ld. CIT(A)'s findings and upheld the use of the CUP method as the most appropriate for benchmarking the transactions.

3. Deletion of Addition under "Foreign Exchange Fluctuation Loss":
The assessee had claimed a deduction of Rs. 24,06,174/- for exchange loss resulting from the restatement of a foreign currency loan at the year-end. The AO disallowed this loss, following the reasoning of his predecessors. However, the Ld. CIT(A) allowed the deduction, noting that the loan was partly used for working capital and that the exchange fluctuation loss attributable to working capital was revenue in nature, as held by the Hon'ble Supreme Court in the cases of Woodward Governor Pvt. Ltd. and ONGC vs. CIT. The Tribunal found no infirmity in the Ld. CIT(A)'s order and affirmed the deletion of the addition.

4. Justification of Purchases from Allegedly Bogus Non-Existent Parties:
The AO had added Rs. 14,44,089/- to the assessee's income, citing transactions with two parties whose notices were returned unserved. The Ld. CIT(A) allowed the assessee's appeal, noting that the expenses were incurred through cheque payments, with bills and vouchers produced before the AO. The Ld. CIT(A) also found that the commission paid was supported by invoices and TDS deductions. The Tribunal upheld the Ld. CIT(A)'s decision, agreeing that non-compliance with notices u/s 133(6) could not be a basis for disallowing the expenses when sufficient evidence was available.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the Ld. CIT(A)'s decisions on all grounds. The order was pronounced in the open court on 2nd November, 2022.