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2014 (4) TMI 816 - AT - Income TaxValidity of revised return - Whether Assessee s return filed along with TP report is to be considered or not Held that - When Assessee files a revised loss return reducing claim of loss, the return can certainly be considered as a revised return under the provisions of section 139(5) of the Act. First of all, the return filed originally on 28-10-2006 cannot be considered as a valid return as it did not include statutorily prescribed TP documentation and Assessee declared the value of international transaction as per its accounts books. Therefore, the other/revised return filed on 29-11-2006 enclosing TP documentation and declaration of higher value of international transaction by making suo-moto adjustment under the provisions of the Act cannot be rejected as the same was a valid return, even though, stated to be filed u/s 139(5) of the Act. In fact, to the extent of declaration of international transaction and adjustments, it can be certainly be stated as omission on the part of Assessee or in a worse situation a wrong statement in the original return, as provided u/s 139(5) - both the TPO and DRP erred in not considered the same, the AO is directed to consider the revised return as a valid return Decided in favour of Assessee. Validity of AO s adjustment Suo-moto adjustment ignored - Whether adjustment made by the AO ignoring suo-moto adjustment made by the Assessee is correct or not Held that - Relying upon Haworth (India) P. Ltd. Versus Deputy Commissioner of Income-tax 2013 (8) TMI 421 - ITAT DELHI - the TPO/DRP are not correct in not considering suo-moto adjustments made by Assessee - For arriving at the profit margins realized by the enterprise, suo-moto adjustment has to be taken into account in arriving at the difference to be added so as to make the net profit realised to arrive at the arm s length price in relation to the international transaction as provided under 10B(e)(v) - The AO is directed to consider suo-moto adjustment made by Assessee accordingly Decided in favour of Assessee. Adoption of operating cost - Whether operating cost adopted by TPO is correct or not Held that - Without considering the objections of Assessee, TPO determined the operating cost based on the proportionate cost on the ratio of sales in various segments - The action of the TPO was not justified at all when Assessee has maintained separate books of account, which was also accepted under the provisions of the Act - there is no reason for rejecting the same and estimating the operating cost on the basis of the proportionate turnover - Assessee has incurred loss in these transactions, whereas there was profit in other activity, which constitute 95% of Assessee s turnover - Taking sales as basis and arriving at the OP cost does not result in correct appreciation of Assessee s transactions - since segmental working is available on the basis of separate books of account maintained for EOU unit, operating cost has to be taken at Rs. 18,84,61,988/- and the TPO/AO is directed to take operating cost as stated Decided in favour of Assessee. Invocation of threshold limit - Whether ( )/(-) 5% threshold limit available under the Act can be invoked Held that - The actual transaction undertaken by Assessee as reported is the sale at Rs. 17,17,79,149 - If the ALP determined by the AO/TPO is ( )/(-) 5% of this transaction on actual sales reported, then no adjustment is required - While making any adjustment, first step is to verify whether this ( )/(-) 5% threshold has exceeded when compared to actual transaction undertaken by Assessee, if yes, adjustment is required under the provisions of the Act - The next step is the quantification of adjustment which is to be made under Rule 10B(e) - suo-moto adjustment made by Assessee cannot be ignored and if any adjustment is required over and above suo-moto adjustment made by Assessee, difference only can be considered - the actual transaction undertaken by Assessee should be the base and not revised transaction reported by making suo-moto adjustment - the Assessee exercised option provided u/s 92C particularly of proviso of ( ) or (-) 5% threshold and did not treat the actual sale transaction as ALP no assessee cannot contend that the threshold of (-) or ( ) 5% is available again, if TPO action results in further addition Decided against Assessee. Selection of comparables Held that - There are two sets of objections on the comparables selected by TPO; one being data pertaining to companies which have different accounting period than that of Assessee and the second one being the functional comparability of selected companies, being in business of compressor manufacturing whereas adjustments were done in the segmented results of supply of components (to the compressors) - selection of comparables by TPO suffers from these basic deficiencies, the matter required re-examination thus, the matter is remitted back to the AO for fresh adjudication Decided in favour of Assessee. Disallowance of depreciation Held that - If proper analysis was made there would not be any difference from the price paid to the price determined, as demonstrated before the TPO both on the basis of the third party quotations which are considered as internal CUP and the VG Bouw Certificates as external CUP - Under both the workings Assessee is able to justify the price paid - assessee justified the price paid by way of a certificate which can be considered as external CUP - TPO/DRP did not rely on any other certificate and in the absence of any contrary information, price paid by Assessee, which was lesser than the value mentioned in the certificate can be accepted as such- decided in favour of Assessee.
Issues Involved:
1. Consideration of Assessee's revised return filed along with Transfer Pricing (TP) report. 2. Adjustment made by the AO ignoring suo-moto adjustment made by the Assessee. 3. Correctness of operating cost adopted by TPO. 4. Correctness of comparables selected by the TPO. 5. Applicability of (+)/(-) 5% threshold limit under the Act. 6. Determination of value of imported machinery by the TPO thereby denying depreciation. Issue-wise Detailed Analysis: (A) Consideration of Assessee's revised return filed along with TP report: The Assessee filed a revised return on 29-11-2006, reducing the total loss by making a suo-moto adjustment based on TP documentation. The Tribunal found that the revised return was valid under section 139(5) of the IT Act, as it included the required TP documentation, which was missing in the original return. The Tribunal directed the AO to consider the revised return as valid, allowing the Assessee's grounds on this issue. (B) Adjustment made by the AO ignoring suo-moto adjustment made by the Assessee: The Tribunal emphasized that under Rule 10B(e)(i), the 'net profit margin realized' by the enterprise from an international transaction should be computed, considering any suo-moto adjustments made by the Assessee. The Tribunal cited the ITAT Delhi Bench decision in the case of Haworth (India) (P.) Ltd., which supported the consideration of suo-moto adjustments. The Tribunal directed the AO to consider the suo-moto adjustment made by the Assessee. (C) Correctness of operating cost adopted by TPO: The Tribunal found that the TPO's action of determining the operating cost based on proportionate turnover was unjustified when the Assessee maintained separate books of account for its 100% EOU unit. The Tribunal directed the AO to take the operating cost as Rs. 18,84,61,988/- as reported by the Assessee, allowing this contention. (D) Correctness of comparables selected by the TPO: The Tribunal noted that the selection of comparables by the TPO suffered from deficiencies, such as using companies with different accounting periods and functional dissimilarities. The Tribunal restored the issue of arriving at ALP to the file of the TPO/AO for fresh consideration, directing them to select proper comparables and determine the ALP afresh. (E) Applicability of (+)/(-) 5% threshold limit under the Act: The Tribunal clarified that the threshold limit of (+)/(-) 5% should be applied to the actual transaction undertaken by the Assessee, not the revised transaction reported after suo-moto adjustment. The Tribunal rejected the Assessee's contention that the threshold limit should be applied to the revised transaction, emphasizing that the comparison should be with the actual transaction value. (F) Determination of value of imported machinery by the TPO thereby denying depreciation: The Tribunal found that the TPO and DRP erred in valuing the imported machinery at Nil without any basis, despite the Assessee providing a valuation report from M/s SGS Global Trade Solutions Inc. The Tribunal directed the AO/TPO to accept the Assessee's valuation and allow depreciation as claimed, as there was no contrary valuation report from the revenue authorities. Conclusion: The appeal of the Assessee was partly allowed for statistical purposes, with directions for the AO/TPO to reconsider certain issues and accept the Assessee's contentions on others. The Tribunal emphasized the need for proper consideration of revised returns, suo-moto adjustments, and accurate valuation of imported machinery.
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