2025 (3) TMI 1269 - AT - Income Tax

TP Adjustment - selection of MAM - assessee has adopted RPM method however TPO has noticed that it has adopted other method - HELD THAT - TPO has misunderstood the clear directions of the DRP on the aspect of FAR profile of the assessee and applicability of RPM in the case of the assessee which was accepted by the Revenue in the earlier assessment years. There is no clear finding on the aspect of non-applicability of RPM and TPO merely and grossly rejected the RPM with the observation that assessee is not a pure distributor and it also does manufacturing activity. In our considered view the TPO has grossly misunderstood the business of the assessee and proceeded to complete the ALP on the basis of TNMM method. In our considered view the TPO has to redo the ALP adjustment on the basis of various details available on record which shows that assessee has two segments (a) manufacturing and (b) trading activities and the ALP of the trading activities was accepted by the Revenue in the earlier assessment years on the basis of RPM. Therefore we are inclined to remit this issue back to the file of AO/TPO to redo the ALP adjustment on the basis of RPM. Disallowance of expenditure claimed in ITR - assessee was not able to verify the genuineness of the expenses thus proceeded to disallow 10% of the total expenditure u/s 37 - HELD THAT - We are inclined to remit this issue to the file of Assessing Officer to verify the additional evidences submitted by the assessee. Accordingly we direct the Assessing Officer to verify the additional evidences and allow the claim of the assessee as per law after giving proper opportunity of being heard to the assessee. Accordingly ground no.8 raised by the assessee is allowed for statistical purposes. Addition u/s 69C - Addition made merely relying on the information available from CBEC export and import data - HELD THAT - From the assessment order we observed that even Assessing Officer does not have details of customs duty paid by the assessee. For the sake of justice we are inclined to remit back this issue to the file of Assessing Officer to collect the information from assessee. Assessing Officer cannot make the addition merely on the basis of CBEC export import data and Assessing Officer has to collect the total imports made by the assessee during the year and reconcile the same with customs duty paid by the assessee. Needless to say that assessee may be given an opportunity of being heard and we direct the assessee also to submit the relevant information before the Assessing Officer. Accordingly ground no.9 raised by the assessee is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the judgment include:

• The appropriateness of the transfer pricing adjustments made by the Revenue, specifically regarding the rejection of the Resale Price Method (RPM) in favor of the Transactional Net Margin Method (TNMM) for determining the Arm's Length Price (ALP) of international transactions.
• The correctness of disallowances and additions made under sections 37 and 69C of the Income Tax Act, 1961, concerning certain expenses and customs duty discrepancies.
• The treatment of book profit calculations under section 115JB and the setting-off of brought forward business losses and unabsorbed depreciation.
• The imposition of interest under sections 234B and 234C and the initiation of penalty proceedings under sections 270A and 271 AAC.

2. ISSUE-WISE DETAILED ANALYSIS

Transfer Pricing Adjustments (Grounds 3 to 7)

• Relevant Legal Framework and Precedents: The judgment discusses the application of the Resale Price Method (RPM) versus the Transactional Net Margin Method (TNMM) under the Income Tax Act and related rules. Precedents from various judicial pronouncements were considered, emphasizing the need for consistency and the appropriateness of RPM in trading transactions.
• Court's Interpretation and Reasoning: The Tribunal noted the failure of the Transfer Pricing Officer (TPO) to provide a speaking order justifying the rejection of RPM, which was consistently applied in previous years. The Tribunal emphasized the need for a clear finding on the applicability of RPM, considering the functional, asset, and risk (FAR) profile of the assessee.
• Key Evidence and Findings: The Tribunal observed that the TPO did not adequately consider the segmental profitability and FAR analysis submitted by the assessee, which supported the use of RPM.
• Application of Law to Facts: The Tribunal found that the TPO misunderstood the business operations of the assessee and erroneously applied TNMM without sufficient justification.
• Treatment of Competing Arguments: The Tribunal considered the assessee's argument that RPM was appropriate due to the nature of its business as a distributor with minimal value addition.
• Conclusions: The Tribunal remanded the issue back to the TPO/AO to reconsider the ALP determination using RPM, directing the assessee to provide audited segment reports and relevant documentation.

Disallowance under Section 37 (Ground 8)

• Relevant Legal Framework: Section 37 of the Income Tax Act pertains to the allowability of business expenses.
• Court's Interpretation and Reasoning: The Tribunal noted the Assessing Officer's (AO) disallowance due to lack of evidence but acknowledged the assessee's submission of additional evidence.
• Key Evidence and Findings: The AO had disallowed 10% of expenses due to insufficient documentation.
• Application of Law to Facts: The Tribunal directed the AO to verify the additional evidence and allow the expenses as per law.
• Conclusions: The issue was remanded to the AO for verification of additional evidence.

Addition under Section 69C (Ground 9)

• Relevant Legal Framework: Section 69C addresses unexplained expenditure.
• Court's Interpretation and Reasoning: The Tribunal noted the discrepancy in customs duty figures and the lack of detailed information from the AO.
• Key Evidence and Findings: The AO relied on CBEC data without reconciling it with the assessee's submissions.
• Application of Law to Facts: The Tribunal emphasized the need for a detailed reconciliation of customs duty payments.
• Conclusions: The issue was remanded to the AO for reconciliation and verification of customs duty payments.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: The Tribunal highlighted the importance of consistency in applying transfer pricing methods and the necessity for the TPO to provide a speaking order addressing the applicability of RPM.
• Core Principles Established: The judgment reinforces the principle of consistency in transfer pricing and the need for detailed reasoning when deviating from established methods.
• Final Determinations on Each Issue: The Tribunal remanded the transfer pricing and customs duty issues back to the AO/TPO for reconsideration, while directing the AO to verify additional evidence for disallowed expenses.

The appeals for both assessment years were partly allowed for statistical purposes, with directions for further verification and reconsideration by the AO/TPO.