2013 (8) TMI 826 - AT - Income Tax

Adjustment of arm's length price - CIT revised order of TPO and enhanced assessee's income - Assessee used Cost Plus Method to determine International transaction relating to purchase and Net Margin Method for sale - TPO has applied TNMM as most appropriate method for bench marking - Held that - The Commissioner of Income Tax(Appeals) has determined the ALP by taking the TNMM as most appropriate method but at the entity level of the assessee. The Commissioner of Income Tax(Appeals) has arrived at the arithmetic mean of the comparables operating profit at 8.33% against the operating profit at the entity level of the assessee at 4.71% - sale price of the assessee is within the tolerance limit of 5% as per the proviso to section 92C(2) of the Income Tax Act, which is clear from the working of the Commissioner of Income Tax(Appeals) - The operating cost of the assessee is within the 5% tolerance range of the ALP determined by the Commissioner of Income Tax(Appeals), therefore, no adjustment is called for on this account. It is pertinent to note that the Commissioner of Income Tax(Appeals) has determined the arm's length by considering the entity level results of the assessee which includes all the international transactions, therefore, when the over all price of the assessee is within the range of 5% of ALP being the arithmetic mean then no adjustment is permitted - Decided in favour of assessee. Computation of book profit u/s 115JB - The assessee in the return of income has not increased book profit computed u/s 115JB on account of diminution in value of investment debited to the profit and loss account, however, during the assessment proceedings the assessee conceded the adjustment in view of the retrospective amendment in section 115JB with effect from 1.4.2004 by the finance Act 2009 - Assessing Officer has not examined this issue from the angle of the actual written of the amount as the assessee conceded the same - Following decision of CIT Vs Yokogawa India Ltd. 2012 (9) TMI 390 - ITAT BANGALORE - Matter remitted back for fresh adjudication.

Summary

Issues Involved:
1. Adjustment to Arm's Length Price (ALP) of International Transactions.
2. Determination of ALP for Payment of Royalty.
3. Methodology for ALP of Purchase of Components.
4. Adjustment of Diminution in Value of Investment under Section 115JB.
5. Provision for Warranty Expenses.

Detailed Analysis:

1. Adjustment to Arm's Length Price (ALP) of International Transactions:
The assessee contested the adjustment of Rs. 2,56,62,326 to the total income to arrive at the ALP of international transactions, which resulted in an enhancement by Rs. 1,05,94,098. The Commissioner of Income Tax (Appeals) [CIT(A)] determined the ALP using the Transaction Net Margin Method (TNMM) and adjusted the operating profit to sales ratio. The Tribunal noted that the assessee's operating cost was within the 5% tolerance range of the ALP, thus no adjustment was necessary.

2. Determination of ALP for Payment of Royalty:
The CIT(A) confirmed the Transfer Pricing Officer's (TPO) determination that the royalty payment of Rs. 1,50,68,228 was not at arm's length, adjusting it to nil. The Tribunal upheld the CIT(A)'s decision but noted that the overall price was within the 5% tolerance range, thus no adjustment was required.

3. Methodology for ALP of Purchase of Components:
The CIT(A) adopted TNMM as the most appropriate method for the purchase of components, which the assessee originally benchmarked using the Cost Plus Method (CPM). The CIT(A) enhanced the adjustment to Rs. 2,56,62,326. However, the Tribunal noted that the CIT(A) should have considered only the data of international transactions instead of entity-level results. As the revenue did not challenge the CIT(A)'s findings, the Tribunal did not delve further into this issue.

4. Adjustment of Diminution in Value of Investment under Section 115JB:
The assessee raised an additional ground regarding the adjustment of Rs. 1,62,91,484 for diminution in the value of investment while computing book profit under section 115JB. The Tribunal admitted the additional ground and remitted the issue to the Assessing Officer (AO) for fresh consideration, noting that the amount was actually written off and not a mere provision.

5. Provision for Warranty Expenses:
The AO added Rs. 47,52,496 on account of provision for warranty expenses, treating it as a contingent liability. The CIT(A) deleted this addition, following the Supreme Court's decision in Rotork Controls India Pvt. Ltd. v. CIT. The Tribunal remitted the issue back to the AO to verify if the provision was based on reliable estimates and scientific data, as required by the Supreme Court's decision.

Conclusion:
The Tribunal partly allowed the assessee's appeal and remitted certain issues back to the AO for further examination. The revenue's appeal was allowed for statistical purposes, requiring the AO to re-evaluate the provision for warranty expenses and the adjustment under section 115JB. The Tribunal emphasized the need for precise and reliable data in determining ALP and provisions for liabilities.