2016 (8) TMI 856 - AT - Income Tax

Transfer pricing adjustment - upward adjustment of the international transactions in respect of valuation of capital asset purchased from AE - Held that - TPO has made upward adjustment of the international transactions in respect of valuation of capital asset purchased by the assessee from its AEs. The said adjustment has been made by the TPO without making reference to the DVO and rejecting the valuation report from an independent Chartered Engineer furnished by the assessee. Undisputedly the valuation report was accepted by the Customs Authorities for the purpose of levy of import duty. We do not concur with the action of TPO for making such adjustment. The Act provides for reference to Valuation Officer for valuation of capital assets in case of any doubt. The TPO has erred in extrapolating avg. operating margin of Indian manufactures and applying CUP method to markup import price and determine ALP. In so far as objection of TPO with respect to variation in the book value of capital asset and the price at which assessee has purchased the capital asset is concerned, it is not necessary that book value and market value of the capital asset are at par. As observed that the DRP while dealing with the objections of the assessee in respect of valuation of capital asst has not properly appreciated the facts and circumstances. The DRP has merely examined one aspect of the transaction relating to pricing of capital asset i.e. the price paid by assessee to acquire old machine viz-a-viz price of new model of same machine. The DRP has failed to take holistic view of the transaction. Thus we set aside the findings of the authorities below on this issue and direct the Assessing Officer to delete the addition made on account of adjustment in the value of capital asset - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of assessment order
2. Payment of divisional recharge
3. Transfer Pricing - Purchase of Capital Assets
4. Payment of royalty

Issue-wise Detailed Analysis:

1. Validity of Assessment Order:
The assessee raised a challenge to the validity of the assessment order but did not press this ground during the appeal. Consequently, the Tribunal dismissed this ground as not pressed.

2. Payment of Divisional Recharge:
The assessee initially contested the findings of the lower authorities regarding the payment of divisional recharge but subsequently withdrew this ground. Therefore, the Tribunal dismissed this ground as withdrawn.

3. Transfer Pricing - Purchase of Capital Assets:
The primary issue adjudicated was the transfer pricing adjustment related to the purchase of capital assets. The TPO had rejected the valuation provided by the assessee, which was based on a certificate from an independent Chartered Engineer, and instead applied the Comparable Uncontrolled Price (CUP) method. The TPO used the written down value (WDV) of the assets in the books of the AE and added an ad-hoc mark-up to determine the arm's length price, resulting in an upward adjustment of ?1,69,52,440.

The assessee argued that the valuation certificate was accepted by the Customs Department and that the TPO should have referred the matter to the Departmental Valuation Officer (DVO) if there were doubts about the valuation. The Tribunal agreed with the assessee, noting that the TPO should have sought expert opinion from the DVO rather than making arbitrary adjustments.

The Tribunal cited several precedents, including:
- Chennai Bench of the Tribunal in M/s. Coastal Energy Pvt. Ltd. Vs. The Assistant Commissioner of Income Tax: The Tribunal held that the value adopted by customs authorities should be accepted as it is based on scientifically formulated methods.
- Hyderabad Bench of the Tribunal in Tecumseh Products India (P.) Ltd. Vs. Assistant Commissioner of Income Tax: The Tribunal emphasized that the TPO should refer the machinery to a valuation officer if there is any doubt.
- Mumbai Bench of the Tribunal in Asstt. Commissioner of Income Tax Vs. M/s. Koch Chemical Technology Group (India) Limited: The Tribunal held that the TPO must refer to the DVO for valuation and cannot arbitrarily determine the value.

The Tribunal concluded that the TPO erred in extrapolating the average operating margin of Indian manufacturers and applying the CUP method. It set aside the findings of the authorities below and directed the Assessing Officer to delete the addition made on account of the adjustment in the value of the capital asset.

4. Payment of Royalty:
The assessee also initially raised an issue regarding the payment of royalty but subsequently withdrew this ground. The Tribunal dismissed this ground as withdrawn.

Conclusion:
The appeal was partly allowed. The Tribunal directed the deletion of the addition made on account of the transfer pricing adjustment for the purchase of capital assets, while dismissing the other grounds as either not pressed or withdrawn.