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2015 (3) TMI 1010 - AT - Income TaxTransfer pricing adjustment - inclusion and exclusion of certain cases in the final list of comparables for benchmarking the assessee's international transactions of imports and exports - Held that - Dai-Ichi Karkaria Ltd.(DIKL) - AR has fairly admitted that two cases chosen by the TPO, namely, Atul Ltd and IG Petrochemicals Ltd. are, in fact, comparable. When such comparable cases are available, then there is no need to attempt the inclusion of some other cases which are not at all or negligibly comparable. We, therefore, uphold the impugned order on the exclusion of DIKL from the eventual list of comparables. Sunshield Chemicals Ltd (SCL) - if the other case being largely different in the functional profile, but comparable part is minimal, such case can not be considered as comparable, we find no difficulty in upholding the impugned order in rightly excluding the case of SCL from the final list of comparables drawn by the TPO. Micro Ink Ltd. (MIL)- As no segmental data of MIL dealing with the manufacture of specialty chemicals, more specifically which are manufactured by the assessee, is available, such a case cannot be included in the list of comparables. We, therefore, set aside the impugned order on this issue and order for the exclusion of this case from the list of comparables. Pidilite Industries Ltd. (PIL) - an admitted fact that there is acquisition and de-merger in the case of PIL during the year under consideration, and a company cannot be considered as a comparable because of exceptional final results due to mergers/de-mergers. This case is directed to be excluded from the eventual list of comparables. The cases of DIKL and SCL were rightly excluded by the TPO and the cases of MIL and PIL were erroneously included in the list of comparables. The impugned order is, therefore, set aside and it is directed to determine the arm's length margin afresh on the basis of the remaining two cases, namely, Atul Ltd. and IG Petrochemicals Ltd. It is further held that the scope of the transfer pricing adjustment should be restricted to the international transactions, which means, transaction between AEs alone and not non-AEs. The AO/TPO is further directed to give effect to the provisions of section 92C by making of 5% adjustment, if permissible, in the fresh exercise to be done in compliance with our above direction Disallowance of management service charges paid to the AEs - Held that - There can be no dispute that ALP of an international transaction in the nature of expense claimed can be computed at Nil, if the assessee fails to prove the factum of having availed any services from the AE. Even if the services are availed, the consideration paid has to be proved at ALP, failing which adjustment is inevitable. Adverting to the facts of the instant case, we find that the assessee claims to have availed such services in the past as well for which deduction was not denied. At the same time, it is equally essential on the part of the assessee to prove in the first instance that it, in fact, availed the services provided by its AEs in the current year and also that the payment is at ALP. As the assessee failed to substantiate its claim for deduction in this regard before the AO/TPO and it is further claimed that adequate opportunity was not provided by the concerned authorities, we are of the considered opinion that it will be in the fitness of the things if the impugned order on this issue is set aside and the matter is restored to the file of AO/TPO for deciding this issue afresh as per law after allowing a reasonable opportunity of being heard to the assessee - Decided in favour of assessee for statistical purposes. Addition under section 145A in connection with the value of closing stock - Held that - Section 145A came to be inserted by the Finance (No.2) Act, 1995 w.e.f. 1.4.1999 providing for the valuation of purchase and sale of goods and inventory in accordance with the method of accounting regularly employed by the assessee and further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. Pursuant to insertion of section 145A it has now become mandatory to value inventory on 'inclusive' and not 'exclusive' method which was followed by the assessee. Under the section, not only purchase and sale of goods but also the inventory is required to be valued as inclusive of the amount of tax, duty or fee etc. Further, such duty is to be included not only in the value of closing stock but also the opening stock. The Hon'ble jurisdictional High Court in the case of CIT v. Mahalaxmi Glass Works (P.) Ltd. 2009 (4) TMI 182 - BOMBAY HIGH COURT has held that where unutilized Modvat credit is adjusted in the closing stock, similar adjustment should also be made to the opening stock as well. The Hon'ble Delhi High Court in the case of CIT v. Mahavir Alluminium Ltd. 2007 (11) TMI 41 - HIGH COURT OF DELHI has also canvassed similar view. Respectfully following the above precedents, we set aside the impugned order on this issue and direct the AO to decide it as per law.- Decided in favour of assessee for statistical purposes.
Issues Involved:
1. Inclusion and exclusion of comparables for benchmarking international transactions. 2. Disallowance of management service charges. 3. Addition under section 145A regarding the value of closing stock. 4. Addition under section 40(a)(ia). 5. Charging of interest under section 234B and 234C. Issue-wise Detailed Analysis: 1. Inclusion and Exclusion of Comparables for Benchmarking International Transactions: The primary issue revolved around the inclusion and exclusion of certain comparables for benchmarking the assessee's international transactions related to imports and exports. The assessee, engaged in the manufacture of specialty chemicals, selected four comparables: Dai- Ichi Karkaria Ltd., Sunshield Chemicals Limited, Indo-Nippon Chemicals Company Ltd., and Resinova Chemie Limited. The Transfer Pricing Officer (TPO) rejected these and selected Atul Ltd., IG Petrochemicals Ltd., Micro Inks Ltd., and Pidilite Industries Ltd. The Tribunal upheld the TPO's exclusion of Dai- Ichi Karkaria Ltd. and Sunshield Chemicals Limited due to functional dissimilarities. However, it directed the exclusion of Micro Inks Ltd. and Pidilite Industries Ltd. due to the lack of segmental data and the presence of mergers and acquisitions, respectively. The Tribunal emphasized that the transfer pricing adjustment should be restricted to transactions with Associated Enterprises (AEs) only. 2. Disallowance of Management Service Charges: The assessee claimed a deduction for management service charges paid to its group companies amounting to Rs. 3,11,52,568/-. The TPO proposed an adjustment for the same amount, citing a lack of evidence regarding the services received. The Tribunal found that the issue was not properly examined at the lower level and restored the matter to the Assessing Officer (AO)/TPO for fresh adjudication, allowing the assessee a reasonable opportunity to substantiate its claim. 3. Addition Under Section 145A Regarding the Value of Closing Stock: The AO observed that the assessee followed the 'exclusive method' of valuing inventory, which did not include excise duty, contrary to section 145A of the Income Tax Act. An addition of Rs. 1,25,91,360/- was made. The Tribunal directed the AO to re-evaluate the issue, ensuring that both opening and closing stocks are adjusted to include the duty element, following the precedents set by the Hon'ble jurisdictional High Court and the Hon'ble Delhi High Court. 4. Addition Under Section 40(a)(ia): The assessee did not press this ground, and thus, it was dismissed by the Tribunal. 5. Charging of Interest Under Section 234B and 234C: The Tribunal noted that the issue of charging interest under sections 234B and 234C is consequential and dependent on the final determination of the other issues. Conclusion: The appeal was partly allowed for statistical purposes, with directions for fresh adjudication on certain issues and upholding the exclusion of certain comparables. The Tribunal emphasized the need for proper functional comparability and adherence to statutory provisions in determining the arm's length price and other related adjustments.
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