2018 (6) TMI 1501 - AT - Income Tax

Transfer pricing adjustment to the international transaction of intragroup services - Held that - Intragroup services involved in the year under consideration are identical to the facts and circumstances and the intragroup services availed in assessment year 2012-13 it is expected from the assessee for proper benchmarking to lead evidence with respect to each of the nature of services with respect to each class of services mentioned in the above chart with corresponding manner of rendering of the services, the time lag of initiation of services and closure of the services. The evidences produced are apparently very general and do not show the rendering of the services. We set aside the appeal of the assessee to the file of TPO/AO for verifying the evidence of rendering of the services by the AE with respect to nature of each of the services listed in the agreement. The assessee is also further directed to lead proper and credible evidence with respect to nature of services and how and when those services have been rendered by the AE. It is also made clear that AO shall not question the need and benefit arising out of these services as the same have been conclusively decided by the order of the coordinate bench for earlier years in the case of the assessee itself. Appeal of the assessee with respect to ground No. 1, 2, and 3 are allowed with above direction accordingly. Addition made on account of fall in gross profit of the assessee - Held that - It is evident that the Assessing Officer has neither invoked section 145 (3) nor rejected books of accounts of the assessee. In such circumstances, we do not understand as how the Assessing Officer has made addition for decrease in gross profit rate during the year under consideration. In the normal business, it is not necessary that always the gross profit rate will be steady and it may increase or decrease depending on the prevailing business atmosphere. Without rejecting books of accounts of the assessee, the Assessing Officer cannot tweak with the gross profit rate declared by the assessee. We direct the Assessing Officer to delete the said addition. Disallowance of expenditure in respect of intra-group services made under section 37(1) - Held that - We find that though the transfer pricing addition for intra-group services has been made, but no disallowance under section 37(1) has been made on protective or otherwise basis in those years. Thus, the Revenue has in earlier and subsequent year accepted this position that no such disallowance is required. The facts and circumstances in the year under consideration on the issue in dispute are identical to the earlier and subsequent assessment years and the Revenue has accepted that no disallowance under section 37(1) is required, in such circumstances, the Revenue cannot insist for sustaining the addition in view of the rule of consistency - Appeal of the assessee is partly allowed for the statistical purposes.

Issues Involved:

1. Validity of the assessment order.
2. Transfer pricing adjustment for intra-group services.
3. Jurisdictional error in referring the matter to the Transfer Pricing Officer (TPO).
4. Best judgment assessment under Section 144 of the Income Tax Act.
5. Addition on account of fall in Gross Profit (GP) ratio.
6. Disallowance under Section 37(1) of the Income Tax Act.

Detailed Analysis:

1. Validity of the Assessment Order:
The grounds raised by the assessee regarding the validity of the assessment order were general in nature and not specifically adjudicated. The counsel did not press these grounds, and they were dismissed accordingly.

2. Transfer Pricing Adjustment for Intra-group Services:
The primary issue was the transfer pricing adjustment of ?25,19,80,074 for intra-group services. The assessee, a subsidiary of Avery Dennison Corporation, USA, had reported 31 international transactions, with the TPO accepting all except those related to intra-group services in the Pressure Sensitive Materials (PSM) and Retail Branding Information Solutions (RBIS) segments. The TPO and DRP found the services to be in the nature of shareholder services, duplicative services, or services providing incidental benefits, and thus, not satisfying the arm's length principle. The Tribunal noted that similar adjustments had been deleted in preceding years by the Tribunal and affirmed by the High Court. However, for the assessment year 2012-13, the Tribunal had restored the issue to the AO/TPO for verification of the rendition of services. Following this precedent, the Tribunal restored the matter to the AO/TPO for verification, directing that the need and benefit tests were already satisfied, and the focus should be on the actual rendition of services.

3. Jurisdictional Error in Referring the Matter to the TPO:
The assessee did not press the grounds related to the jurisdictional error in referring the matter to the TPO. These grounds were dismissed as infructuous.

4. Best Judgment Assessment under Section 144:
The AO had made a best judgment assessment under Section 144, citing the assessee's failure to justify the fall in GP ratio. However, the Tribunal observed that the AO had verified the bills and invoices and found them in order. The AO had not invoked Section 145(3) or rejected the books of accounts. The Tribunal held that without rejecting the books of accounts, the AO could not make an addition based on the fall in GP ratio. The addition was directed to be deleted.

5. Addition on Account of Fall in Gross Profit (GP) Ratio:
The AO had made an addition of ?39,55,27,776 due to a fall in the GP ratio, estimating the GP rate based on the average of the last three years. The Tribunal noted that the AO had verified the books and found them in order. Without rejecting the books of accounts, the AO could not make an addition based on the GP ratio. The Tribunal directed the deletion of this addition.

6. Disallowance under Section 37(1) of the Income Tax Act:
The AO had made a protective disallowance of ?25,19,80,074 under Section 37(1), considering the intra-group services not incurred wholly and exclusively for business purposes. The Tribunal observed that no such disallowance was made in earlier or subsequent years, and the Revenue had accepted this position. Applying the rule of consistency, the Tribunal directed the deletion of the disallowance.

Conclusion:
The Tribunal restored the matter of determining the arm's length price of intra-group services to the AO/TPO for verification and directed the deletion of the additions made on account of the fall in GP ratio and the protective disallowance under Section 37(1). The appeal was partly allowed for statistical purposes.

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