2016 (5) TMI 53 - AT - Income Tax

Transfer pricing adjustment - MAM - whether comparable uncontrolled price method is appropriate? - Held that - There is no error in the order of the learned Commissioner of Income-tax (Appeals) in considering the evidences produced at the appellate stage. The assessee was prevented by sufficient cause from producing additional evidences before the Transfer Pricing Officer/Assessing Officer because the accountant who was looking after the matter was not well at that stage and ultimately he expired. This explanation of the assessee have not been challenged by the Revenue through any material on record. The learned Commissioner of Income-tax (Appeals) on perusal of the transfer pricing study carried out by the assessee, came to the finding that prices charged from the uncontrolled enterprises are either equal or lower than the prices charged from the associate enter prises. The findings of fact recorded by the learned Commissioner of Income-tax (Appeals) has not been rebutted by the Revenue through any material on record. It would, therefore, clearly support the contention of the assessee that comparable uncontrolled price method was relevant to be applied in the case of the assessee. The learned Commissioner of Income- tax (Appeals) was, therefore, justified in holding that the comparable used by the Transfer Pricing Officer under transactional net margin method was functionally and substantially different from the study of the assessee, therefore, could not lead to correct determination of arm s length price. Therefore, addition made by the Assessing Officer on transactional net margin method would not be justified. In this background, the arm s length price determined according to the comparable uncontrolled price method as carried out by the assessee is correct arm s length pricing recorded in the assessee s books of account. The learned Commissioner of Income-tax (Appeals), therefore, on proper appreciation of evidences and material on record, correctly deleted the addition. - Decided in favour of the assessee Agricultural income - sale of poplar trees - assessee had not submitted the proof of ownership/possession of the land and cultivation - Held that - mmissioner of Income-tax (Appeals), on perusal of the assessment record found that the assessee has filed copy of the lease deed and sapling of poplar trees was done in the year in which land was taken on lease. The record also shows that the assessee has filed copy of certificate issued by Wakf Board transferring the lease in favour of the assessee which was not considered by the Assessing Officer. It was also found that in earlier years, the assessee has shown agriculture income which is accepted. The land was same which was taken from Wakf Board. The learned Commissioner of Income-tax (Appeals), from the details on record found that no agriculture income in respect of the land taken on lease from Wakf Board has been reflected in the income which makes it clear that the assessee had been in possession of the land of the Wakf Board since 1996 and land had not been put to use for regular agriculture operations. The trees had been planted in the year 1996 and were later on sold in the assessment year under appeal. The amounts of sale of poplar trees were received through cheque. The learned Commissioner of Income-tax (Appeals) was, therefore, justified in deciding the issue in favour of the assessee

Issues Involved:
1. Deletion of addition on account of transfer pricing in relation to the arm's length price of the international transaction.
2. Deletion of addition on account of treating agricultural income as "income from other sources".
3. Admission of additional evidence at the appellate stage.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Transfer Pricing:
The Revenue challenged the deletion of an addition of Rs. 1.75 crores related to the arm's length price of international transactions. The Assessing Officer (AO) observed that the assessee, a proprietor of M/s. Munish International, engaged in trading forged goods, had entered into international transactions with associated enterprises. The Transfer Pricing Officer (TPO) determined the arm's length price using the Transactional Net Margin Method (TNMM), selecting Shri Ganesh Forging Ltd. as a comparable company. The TPO found a significant difference in operating profit margins between the assessee and the comparable company, leading to the addition.

The assessee argued that the Comparable Uncontrolled Price (CUP) method was more appropriate, as the transactions with associated enterprises were comparable to those with non-associated enterprises. The Commissioner of Income-tax (Appeals) [CIT(A)] agreed with the assessee, noting that the TPO's chosen comparable, Shri Ganesh Forging Ltd., was functionally different due to its manufacturing activities, whereas the assessee was solely engaged in trading. The CIT(A) found that the CUP method led to a correct determination of the arm's length price, as the prices charged from uncontrolled enterprises were either equal to or lower than those charged from associated enterprises.

The CIT(A) also admitted additional evidence submitted by the assessee, which supported the application of the CUP method. The CIT(A) held that the TPO's study under TNMM was flawed due to the functional differences between the assessee and the comparable company. The CIT(A) concluded that the addition based on TNMM was not justified and directed the deletion of the addition.

2. Deletion of Addition on Account of Treating Agricultural Income as "Income from Other Sources":
The Revenue challenged the deletion of an addition of Rs. 7,50,000, which the AO had treated as "income from other sources" instead of agricultural income. The AO doubted the assessee's claim of earning agricultural income from the sale of poplar trees, as the assessee did not provide sufficient evidence of possession and cultivation of the land.

The CIT(A) found that the assessee had submitted proof of ownership and possession of the land, including a lease deed and a certificate from the Wakf Board. The CIT(A) noted that the assessee had been declaring agricultural income for several years, which had been accepted by the Revenue. The CIT(A) concluded that the income from the sale of poplar trees was indeed agricultural income and directed the deletion of the addition.

3. Admission of Additional Evidence at the Appellate Stage:
The Revenue challenged the CIT(A)'s decision to admit additional evidence at the appellate stage. The assessee explained that the additional evidence was necessary to support the details already filed during the assessment proceedings. The CIT(A) considered the additional evidence, noting that it was relevant and supported the assessee's claim.

The CIT(A) found that the assessee had been prevented by sufficient cause from producing the additional evidence earlier due to the illness and subsequent death of the accountant handling the matter. The CIT(A) held that the additional evidence was admissible and supported the application of the CUP method.

Conclusion:
The Tribunal upheld the CIT(A)'s decision on all grounds. The Tribunal agreed that the CUP method was appropriate for determining the arm's length price and that the additional evidence was rightly admitted. The Tribunal also concurred with the CIT(A) that the income from the sale of poplar trees was agricultural income. Consequently, the Revenue's appeal was dismissed.

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