2018 (1) TMI 728 - AT - Income Tax

TPA - upward adjustment under the head writing off of obsolete stock - Held that - We do not find any reason in the order of the AO/TPO for not allowing write off of obsolete stock for this year. In other words they have made addition without mentioning the new facts that had come to their notice while completing the assessment of the year under appeal and which were different form earlier AY s. CUP was not the method to determine the ALP of the disputed transaction. Lastly we hold that destroying the obsolete stock after writing it off was an extra ordinary event. Thus we are of the opinion that the DRP was not justified in confirming the order of the TPO who had made upward adjustment under the head writing off of obsolete stock. GOA-2 is decided in favour of the assessee. Provision of market information services(MIS) provided to the AE - Held that - TPO had held that the assessee was providing information to its AE that it was not being compensated for such services that he referred to the clause 11 of the DA in his support to hold that it was duty bound to provide MIS on quarterly basis that he estimated the ALP of the said activity at 2% of the total turnover of the assessee that the DRP reduced it to 0. 5%. In our opinion there is nothing in the DA that leads to the conclusion that the assessee was required to furnish MIS to its AE. Even if for the sake of argument it is accepted then the AO/DRP had not followed the valid procedure for making the adjustment. As per the provisions of chapter X of the Act the departmental authorities are required to follow one of the methods as envisaged by Rule 10 of the Rules. They cannot make ad-hoc disallowance. While making assessment under other sections of the Act ad hoc disallowance can be made e. g. rate of GP or expenses incurred for personal use of the partners etc. But under section 92 it is not possible. See Kodak India Pvt. Ltd. case 2016 (7) TMI 677 - BOMBAY HIGH COURT - Decided in favour of the assessee

Summary

Issues Involved:
1. Transfer Pricing (TP) Adjustment for Write-Down of Traded Goods
2. TP Adjustment for Provision of Market Information Services (MIS)

Detailed Analysis:

1. Transfer Pricing (TP) Adjustment for Write-Down of Traded Goods:

The Assessee, an Indian subsidiary of Safilo International B.V., challenged the TP adjustment of ?6.48 crores made by the TPO, which was confirmed by the DRP. The TPO observed that the Assessee had written down goods worth ?6.48 crores as unfit for sale and destroyed them. The TPO argued that the Assessee should have reported this as an international transaction (IT) and sought reimbursement from its AE, as per the Distribution Agreement (DA). The DRP upheld the TPO's view, stating that the write-down had a direct impact on the Assessee's profit and loss and should be recoverable from the AE.

The Assessee contended that the write-down was an extraordinary event and should not be considered for calculating the Profit Level Indicator (PLI). The Assessee argued that the TPO had not followed any prescribed method under Rule 10B for making the adjustment. The Tribunal found that the write-down of obsolete stock was not an IT, as the AE was not involved in the decision to write off the stock. The Tribunal noted that the Assessee had followed proper procedures for writing off and destroying the obsolete stock and that similar write-offs in previous years had not been adjusted by the TPO. The Tribunal concluded that the DRP was not justified in confirming the TPO's adjustment and decided the issue in favor of the Assessee.

2. TP Adjustment for Provision of Market Information Services (MIS):

The TPO noted that the Assessee had not reported the provision of MIS to its AE as an IT and had not received any compensation for it. The TPO determined an adjustment of 2% of the Assessee's turnover, which the DRP reduced to 0.5%. The Assessee argued that it did not provide any service to its AE and that the adjustment was made on an ad hoc basis without following any prescribed method. The Tribunal found that there was no evidence in the DA to suggest that the Assessee was required to provide MIS to its AE. The Tribunal held that the TPO and DRP had not followed the valid procedure for making the adjustment, as they did not apply any of the prescribed methods under Rule 10. The Tribunal referred to the case of M/s. Kodak India Pvt. Ltd., where the Bombay High Court held that the TPO must follow one of the prescribed methods for determining the ALP. The Tribunal decided the issue in favor of the Assessee, stating that the DRP had approved an ad hoc adjustment.

Conclusion:

The Tribunal allowed the Assessee's appeals for both assessment years, concluding that the TP adjustments made by the TPO and confirmed by the DRP were not justified. The Tribunal emphasized the importance of following prescribed methods for determining the ALP and rejected ad hoc adjustments. The decision highlights the need for proper documentation and adherence to agreements in TP matters.