2015 (7) TMI 116 - AT - Income Tax

Transfer pricing adjustment - the TPO determined the ALP of Royalty and Technical knowhow fee as NIL as the assessee did not furnish the details that were called for - Held that - The decision of the TPO to determine the ALP as NIL is also not in accordance with the provisions of sec.92C of the Act on the reasoning that the assessee did not furnish relevant details that were called for by him. We notice that the assessee had contended before the TPO/AO that it had capitalized the technical knowhow fee and hence the Transfer pricing provisions are not applicable to it. Under these set of facts, it appears that the assessee did not furnish the relevant details. In the preceding paragraph, we have rejected the contentions of the assessee and hence the ALP of the technical knowhow payment is required to be determined as per the provisions of the Act. Accordingly, we are of the view that the issue relating to the determination of ALP of Technical knowhow payment requires fresh examination. Accordingly, we set aside the decision rendered by the Ld CIT(A) in respect of the issue relating to Technical knowhow payment and restore the same to the file of the AO/TPO for fresh consideration. Addition made u/s 145A - adjustment of closing stock value with Excise duty amount - Held that - the provisions of sec. 145A mandates that the value of purchase and sale of goods and inventory shall be adjusted to include the amount of tax, duty, cess or fee 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. Hence, for the purposes of Income tax, an assessee is required to follow only inclusive method of accounting the tax, duty etc. In the instant case, we notice that the AO has adjusted the value of closing stock only, to include the amount of tax, duty etc., where as the provisions of sec. 145A requires that the value of purchases and sales should also be adjusted to include the amount of tax, duty etc. Thus, the action of the AO, which was approved by Ld CIT(A), was not in accordance with the mandate of the provisions of sec. 145A of the Act. Compliance of provisions of sec. 145A in part only, would give misleading result. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to apply the provisions of sec. 145A of the Act to purchases, sales and inventory and make addition, if any, is found to be made. T.P adjustment of Royalty payment - Held that - The disallowance to be made u/s 40(a)(i) of the Act would be restricted to ₹ 3.00 lakhs only. This example would make it clear that the disallowance to be made u/s 40(a)(i) is influenced by the T.P adjustments and not vice versa. Accordingly, in our view, the disallowance made/to be made u/s 40(a)(i) would not debar the AO/TPO from determining the ALP of international transactions. In view of the above said contentions, it appears that the assessee did not furnish the relevant details. Since we have rejected the contentions of the assessee, the ALP of the royalty amount is required to be determined as per the provisions of the Act. Accordingly, we are of the view that the issue relating to the determination of ALP requires fresh examination. Validity of assessment order passed by the AO. - Held that - Illegality which has occurred after proper initiation of proceedings vitiates the order and hence the proceedings should be restored back to the stage at which the illegality has occurred. In any case, in the instant case, we have noticed earlier that the revenue was under the impression that the provisions of sec. 144C shall have application from AY 2010-11 and subsequent years and the AO has also acted in a bona fide manner in accordance with the view entertained by the revenue. Under these set of facts, we are of the view that the impugned assessment order suffers from illegality in not following the procedures prescribed under sec. 144C of the Act and hence the said illegality needs to be corrected by restoring the matter to the file of the assessing officer at the stage at which the illegality has occurred. - All the appeals of the assessee are allowed for statistical purpose.

Summary

Issues Involved:
1. Determination of Arms Length Price (ALP) for Royalty and Technical Knowhow payments.
2. Addition made under Section 145A of the Income Tax Act.
3. Validity of the assessment order passed by the Assessing Officer (AO).
4. Interest charged under Sections 234B and 234C of the Act.
5. Validity of initiation of penalty proceedings under Section 271(1)(c) of the Act.

Issue-wise Detailed Analysis:

1. Determination of Arms Length Price (ALP) for Royalty and Technical Knowhow payments:
- AY 2004-05: The assessee claimed deductions for royalty payments of Rs. 5.76 crores and technical knowhow fees of Rs. 0.79 crores. The TPO determined the ALP for these payments as NIL due to the assessee's failure to provide necessary details. The ITAT held that the royalty payment pertained to a period prior to the assessment year under consideration and hence should not have been referred to the TPO. The ITAT directed the AO to allow the deduction of Rs. 5.76 crores under Section 40(a)(i) after due verification. For the technical knowhow fee, the ITAT noted that it should be considered within the scope of international transactions and required fresh examination by the AO/TPO.
- AY 2005-06: The ITAT rejected the assessee's argument that the reversal of royalty payment in AY 2006-07 nullified the need for ALP determination. The ITAT emphasized that future events should not influence the current year's transactions and directed a fresh examination of the ALP for the royalty payment.
- AY 2006-07: The ITAT noted that the AO did not follow the procedure under Section 144C of the Act, as the assessment order was passed after the introduction of the Dispute Resolution Panel (DRP) provisions. The ITAT set aside the assessment order and directed the AO to issue a draft assessment order as per Section 144C.

2. Addition made under Section 145A of the Income Tax Act:
- AY 2005-06: The AO adjusted the closing stock value to include excise duty, which was confirmed by the CIT(A). The ITAT noted that Section 145A requires adjustments to purchases, sales, and inventory to include taxes and duties. Since the AO only adjusted the closing stock, the ITAT set aside the CIT(A)'s order and directed the AO to re-examine the issue in accordance with Section 145A.

3. Validity of the assessment order passed by the Assessing Officer (AO):
- AY 2006-07: The ITAT addressed the validity of the assessment order passed by the AO without following the procedure under Section 144C. The ITAT noted that the AO acted in accordance with the CBDT's circular, which stated that Section 144C applies from AY 2010-11 onwards. However, subsequent clarifications indicated that Section 144C applies to any order proposing variations on or after October 1, 2009. The ITAT held that the AO committed a procedural irregularity and set aside the assessment order, directing the AO to follow the procedure under Section 144C.

4. Interest charged under Sections 234B and 234C of the Act:
- The ITAT did not specifically address the issues related to interest charged under Sections 234B and 234C, as the primary focus was on the procedural and substantive aspects of the assessment and transfer pricing adjustments.

5. Validity of initiation of penalty proceedings under Section 271(1)(c) of the Act:
- The ITAT did not specifically address the validity of penalty proceedings under Section 271(1)(c), as the primary issues were related to the assessment order's validity and transfer pricing adjustments.

Conclusion:
The ITAT set aside the assessment orders and transfer pricing adjustments for the relevant years, directing fresh examinations and adherence to procedural requirements under Section 144C. The appeals were allowed for statistical purposes, emphasizing the need for compliance with statutory provisions and proper determination of ALP for international transactions.