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2013 (9) TMI 645 - AT - Income TaxApplicability of CUP method for determination of ALP in international transaction Geographical difference of comparable material Held that - Geographical difference is not material so far as it applies to the logistics industry - There is splitting of gross profit equally at 50 50 even in Pakistan, Bangladesh and Sri Lanka which fall under the same geographical region No any infirmity in the CUP method (50 50 module) adopted by the assessee Decided in favor of Assessee. Disallowance of expenditure whose records are not available and destroyed - AO not being satisfied, disallowed 2% of expenditure - Accordingly, a sum of Rs.6,23,90,000/- was disallowed - Held that - FIR has been lodged and copy of FIR was also submitted for the destruction of the records - In absence of records some estimate of disallowance has to be made. The chart given by the assessee before Ld. DRP has not been controverted. The difference in the sales and cost of sales as compared to earlier year is 1%. Therefore, disallowance upto 1% of Rs.311,95,42,386/- will meet the interest of justice Decided partly in favor of Assessee.
Issues Involved:
1. Validity of the assessment order pursuant to DRP directions. 2. Transfer Pricing adjustment related to 'Freight receipts and expenses'. 3. Disallowance of expenditure due to record destruction. 4. Levy of interest under section 234D of the Income Tax Act. Issue-wise Detailed Analysis: 1. Validity of the Assessment Order: The appellant contested that the assessment order passed in pursuance to the DRP's directions was flawed both factually and legally. The order confirmed the addition made by the AO to the appellant's income. 2. Transfer Pricing Adjustment: The DRP upheld the addition of Rs.7,03,17,843/- to the appellant's income, stating that the international transaction of 'Freight receipts and expenses' did not meet the arm's length principle under the Act. The DRP supported the TPO's actions in several areas: - Rejection of CUP Method: The DRP agreed with the TPO's rejection of the Comparable Uncontrolled Price (CUP) method and the comparable data from unrelated third parties. - Profit Level Indicator (PLI): The DRP concurred with the TPO's rejection of the Operating Profit (OP) to Value Added Expenses (VAE) ratio as the PLI, instead using OP to Total Cost (TC) ratio. - Economic Analysis: The DRP dismissed the appellant's economic analysis and the search of comparables based on OP/VAE as PLI. - Use of Multiple Year Data: The DRP did not allow the use of multiple year data as prescribed under Rule 10B(4) of the Income Tax Rules, 1962, and determined the arm's length price using financial information of comparables for the year ended March 31, 2008. - TP Adjustment Computation: The DRP computed the TP adjustment on freight receipts rather than expenses, aiming for a larger adjustment. - 5% Range Benefit: The DRP denied the benefit of the +/- 5 percent range mentioned in the proviso to section 92C(2) of the Act. The appellant argued that these grounds were covered in their favor by earlier Tribunal orders for assessment years 2004-05, 2005-06, and 2006-07. The Tribunal found the issue covered in favor of the assessee by earlier orders, noting that similar adjustments were considered and decided in favor of the assessee in previous years. Consequently, the Tribunal deleted the TP adjustment and allowed the related grounds. 3. Disallowance of Expenditure: The AO disallowed Rs.6.24 crores (2% of Rs.311.90 crores) due to the destruction of records in a fire. The appellant argued that the increase in expenses was consistent with the increase in sales and suggested a 1% disallowance instead. The Tribunal, considering the facts and the appellant's submission, sustained a 1% disallowance, amounting to Rs.3,11,95,000/-, and deleted the rest of the addition. 4. Levy of Interest under Section 234D: The appellant contended that the levy of interest under section 234D was consequential. The Tribunal directed the AO to recompute the interest after giving effect to the order, treating this ground as allowed for statistical purposes. Conclusion: The Tribunal partly allowed the appeal, deleting the TP adjustment and reducing the disallowance of expenditure. The interest under section 234D was to be recomputed based on the Tribunal's order. The judgment was pronounced in the open court on 23/07/2013.
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