2014 (11) TMI 45 - AT - Income Tax

Rejection of books of accounts - Difference in the sales and quantitative details of the assessee or not - Estimation of income by applying a profit of Rs. 3200 per bike - Held that - As decided in assessee s own case for the earlier assessment year it has been held that the CIT(A) found the stand taken by the assessee to be correct - The Form 3CEB filed before the AO was found to be not about the number of motorcycles produced by the assessee during the period rather it was found to be concerning the royalty paid by the assessee company during the relevant quarter - CIT(A) noted that besides the assessee had furnished a complete reconciliation before the AO as also incorporated in the assessment order - This reconciliation had been arbitrarily rejected by the AO - CIT(A) rightly held that the AO had erred in concluding that there had been a difference in the sales and quantitative details of the assessee. Royalty payment to 100% holding company Held that - As decided in assessee s own case for the earlier assessment year it has been held that the It cannot be gainsaid that any expenditure incurred wholly and exclusively for the purposes of business is an allowable expenditure even though as in the present case the payment is made to a 100% shareholding company of the payer - That apart u/s 40A(2) of the Act it is only the fair value of such expenditure which is allowable - the arm s length price provisions take care of the payment in such transactions being at arm s length - Neither Section 40(a)(i) nor Section 2(22)(e) of the Act are applicable Decided in favour of assessee. Set off of brought forward business losses and unabsorbed depreciation Held that - Restoration to the AO would have been justified if despite his requiring the assessee to lead further evidence in support of its explanation the assessee had failed to do so and the ld. CIT(A) had accepted the assessee s contention without getting comments from the AO - the AO did not raise any further query on the submissions made before him in this regard revenue has brought no material on record to demonstrate any fallacy in the explanation tendered on behalf of the assessee - no useful purpose will be served in once again sending the matter back to the AO for carrying out the examination of the claim for the fourth time Decided in favour of assessee. Sales price charged on realization of motor cycle understated or not Held that - CIT(A) observed that there was no justification for the AO to make an assumption that the sale price charged by the assessee during the year was lower than that in the preceding year - Now when the Assessing Officer has neither in the assessment order nor in either of the remand reports been able to rebut the categorical assertions of the assessee in this regard as to how the CIT(A) has erred in accepting the assessee s contention has not been made out - merely since the realization per motor cycle for the year was low as compared to that in the preceding year this by itself cannot lead the AO to assume that the sale price charged by the assessee company was under-stated and the AO evidently erred in making such assumption - unless there is material evidence to disprove the contention of the assessee the sale stated in the books of account needs must be accepted. Losses incurred by it as compared to the profits earned by other competitors acceptable or not Held that - Profit can only be made when there is ability to do so - The factors pointed out by the assessee for not being able to make sales have not been refuted - Therefore in the presence of the said factors without a doubt the losses suffered by the assessee cannot be said to be either bogus or inflated - nothing was brought to establish that the assessee had been charging a sale price higher than that noted in the books of account - CIT(A) has correctly held the rejection of the books of the assessee by the AO is incorrect - the assessee had been selling motorcycles at a lower price to its holding and subsidiary companies as compared to its domestic sales - in absence of material the AO could not tinker with the price determined by the TPO thus the rejection of books of account of the assessee by the AO does not hold good - Decided in favour of assessee. Adjustment of ALP - Motor bike exported by the assessee company to AE Held that - The rejection of the resale price method by the TPO was not justified - There has to be continuity and uniformity in the approach of the Revenue towards an issue and particularly in the case of the same assessee - the TPO was not correct in recording this finding that the assessee has not been able to corroborate its analysis - where an assessee has followed one of the standard method for determining the arm s length price such a method cannot discarded in preference over other method - the transactional net margin method i.e. TNMM should be applied only when standard or traditional methods are incapable of being applied because while traditional method seeks to compute the price at which international transactions would normally be entered into by the associated enterprise but for their interdependence and relationship transactional profit method seeks to compute the profit that the tested party would normally earn on such transaction with unrelated parties - TNMM method applied by the TPO for determining the arm s length price is not the most appropriate method. The assessee company has furnished all the relevant data of the foreign party and it is not the case of the TPO that information as called for about the foreign party has not been furnished by the assessee company - by application of the TNMM method in the case of the assessee company the price worked out is not a realistic price - The whole objective of the transfer pricing study is to find out an arm s length price of the product purchased or sold by the assessee company - addition made by TPO and as confirmed by the DRP are unjustified and the same is directed to be deleted Decided in favour of assessee.

Summary

Issues Involved:
1. Rejection of Books of Accounts
2. Estimation of Income
3. Disallowance of Royalty Payment
4. Adjustment of Arm's Length Price (ALP)
5. Set-off of Brought Forward Losses and Unabsorbed Depreciation
6. Charging of Interest under Section 234B

Detailed Analysis:

1. Rejection of Books of Accounts:
The Assessing Officer (AO) rejected the books of accounts of the assessee, citing discrepancies in the quantitative details and sales figures. The AO relied on findings from the assessment year 2006-07, where similar issues were noted. The ITAT found that the AO's rejection was based on assumptions and not substantiated by hard evidence. The ITAT upheld the CIT(A)'s decision, which accepted the assessee's reconciliation and explanations, noting that no discrepancies were found in the remand reports. The ITAT directed the AO to delete the addition of Rs. 86,58,81,600/- made on this ground.

2. Estimation of Income:
The AO estimated the profit per bike at Rs. 3,200 based on the average profit of Hero Honda Motors Ltd. The ITAT found this approach arbitrary and not based on the actual performance of the assessee. The ITAT noted that the AO failed to consider the assessee's explanations regarding market conditions, product mix, and other commercial factors. The ITAT directed the AO to delete the addition made on this basis.

3. Disallowance of Royalty Payment:
The AO disallowed the royalty payment of Rs. 20,99,39,042/- made to Yamaha Motor Co. Ltd., Japan, considering it a colorable device to reduce profits. The ITAT found that the AO's disallowance was based on assumptions without any hard evidence. The ITAT noted that the royalty payment was at arm's length, as determined by the Transfer Pricing Officer (TPO). The ITAT directed the AO to delete the disallowance of royalty payment.

4. Adjustment of Arm's Length Price (ALP):
The TPO proposed an adjustment of Rs. 51,58,00,000/- to the ALP of international transactions, rejecting the assessee's Resale Price Method (RPM) and Cost Plus Method (CPM). The TPO applied the Transactional Net Margin Method (TNMM) using comparables like Bajaj Auto Ltd. and TVS Motor Co. Ltd. The ITAT found that the TPO's rejection of the assessee's method was not justified, as the assessee had provided detailed and reliable data supporting its method. The ITAT also noted that the TPO's application of TNMM led to unrealistic results. The ITAT directed the AO to delete the adjustment made to the ALP.

5. Set-off of Brought Forward Losses and Unabsorbed Depreciation:
The AO denied the set-off of brought forward losses and unabsorbed depreciation, relying on the findings from the assessment year 2006-07. The ITAT noted that the Third Member of the ITAT had resolved the issue in favor of the assessee for the assessment year 2006-07. The ITAT directed the AO to allow the set-off of brought forward losses and unabsorbed depreciation.

6. Charging of Interest under Section 234B:
The interest charged under Section 234B was noted to be consequential in nature and required no separate adjudication.

Conclusion:
The ITAT allowed the appeal filed by the assessee for the assessment years 2007-08 and 2008-09, directing the deletion of various additions and disallowances made by the AO. The ITAT upheld the assessee's methods and explanations, finding the AO's and TPO's approaches arbitrary and unsupported by substantial evidence. The ITAT emphasized the need for consistency and reliability in the application of transfer pricing methods and the assessment of income.