2020 (2) TMI 1176 - AT - Income Tax

Addition to the opening and closing stock of inventories - HELD THAT - Merely relying upon the orders passed by his predecessor in office in assessee s own case for the assessment year 1996 97 onwards, learned Commissioner (Appeals) has upheld the addition made by the Assessing Officer. Notably, while deciding assessee s appeals for the assessment years 1996 97, 1997 98, 1998 99, 2000 01 and 2001 02, the Tribunal in Hon'ble Supreme Court in CIT v/s Woodward Governor India Pvt. Ltd., 2009 (4) TMI 4 - SUPREME COURT held that the value of closing stock is not to include the liability on account of exchange fluctuation. Thus, ultimately, the Tribunal deleted the addition made to the opening and closing stock. Following the aforesaid decision, the Tribunal again decided the issue in favour of the assessee in the assessment year 2003 04, in an appeal being by deleting the addition made on account of adjustment made to the closing stock. The same view was reiterated by the Tribunal over and again while deciding assessee s appeal in the assessment year 2004 05. Thus, following the consistent view of the Tribunal in the preceding assessment years, as referred to above, the addition made by the Assessing Officer on account of adjustment to the opening and closing stock has to be deleted. Disallowance u/s 14A r/w rule 8D - HELD THAT - Now it is fairly well settled that rule 8D is applicable from the assessment year 2008 09. Therefore, the Assessing Officer has completely gone wrong in computing the disallowance under section 14A of the Act by applying rule 8D. Considering the relevant facts, we are of the view that disallowance under section 14A of the Act in the impugned assessment year should be restricted to 5% of the dividend income earned during the year. These grounds are partly allowed. Addition on account of reimbursement of cost incurred on behalf of the Associated Enterprises (AEs) - HELD THAT - Undisputedly, both the Assessing Officer and learned Commissioner (Appeals) have recorded a concurrent finding of the fact that the assessee has failed to furnish any supporting evidence to demonstrate that the reimbursement made by the AEs was at arm's length price. Therefore, the Transfer Pricing Officer has added a mark up of 12.5% on estimate basis to the cost incurred for determining the arm's length price of the service provided. Before us, the assessee has furnished certain additional evidences by way of Debit Notes to demonstrate that the reimbursement was on the basis of actual cost incurred without any mark up. In our considered opinion, the additional evidences furnished by the assessee will have a crucial bearing in deciding the arm's length nature of transaction with the AEs. We are inclined to admit the additional evidences furnished by the assessee. However, since these evidences were not furnished either before the Assessing Officer or before learned Commissioner (Appeals), to provide a fair opportunity to the Revenue to evaluate the evidences and take a decision on the matter, we are inclined to restore the issue to the Assessing Officer for fresh adjudication after due opportunity of being heard to the assessee. Adjustment to the arm's length price of the international transaction with the AE has to be made qua the international transaction and cannot be made at the entity level - Admission of additional ground - HELD THAT - It is the contention of the learned Authorised Representative that if the arm's length price is computed purely on the basis of transaction with the AE, the margin will fall within 5% of the margin of the comparables requiring no further adjustment. Therefore, the issues raised regarding acceptability or otherwise of certain comparables may not have to be decided in the impugned assessment year. Keeping in view the aforesaid submissions of the assessee, we restore the issue back to the file of the Assessing Officer for computing the margin of the assessee by taking into consideration only the transaction with the AE and not at entity level. In case, it is found that assessee s margin falls within 5% of the margin of the rest of the selected comparables, there may not be any need for adjudicating the dispute relating to the comparables in the impugned assessment year. However, the issues relating to the comparables are kept open for adjudication if they arise in any other assessment year in future.Additional ground is allowed for statistical purposes

Summary

Issues Involved:

1. Addition to opening and closing stock of inventories.
2. Disallowance under section 14A r/w rule 8D.
3. Addition on account of reimbursement of cost incurred on behalf of Associated Enterprises (AEs).
4. Adjustment made by the Transfer Pricing Officer at entity level instead of restricting it to AE transactions.

Detailed Analysis:

1. Addition to Opening and Closing Stock of Inventories:

The assessee challenged the aggregate addition of ?58,26,392 to the opening and closing stock of inventories. The Assessing Officer (AO) noticed a foreign exchange fluctuation loss of ?39,18,000 related to raw materials and finished goods and added ?6,71,080 to the closing stock. Additionally, the AO reduced the opening stock by ?51,55,312 due to foreign exchange fluctuation gain in the preceding year, leading to a total addition of ?58,26,392. The Commissioner of Income Tax (Appeals) upheld the AO's decision based on previous years' orders.

The Tribunal noted that in previous years, it had consistently held that the assessee is eligible to claim loss on foreign exchange fluctuation, following the Supreme Court decision in CIT v/s Woodward Governor India Pvt. Ltd. Consequently, the Tribunal deleted the addition made to the opening and closing stock and directed the AO to verify the closing stock value from the previous year and adjust the opening stock accordingly.

2. Disallowance under Section 14A r/w Rule 8D:

The assessee contested the disallowance of ?5,00,000 under section 14A r/w rule 8D. The AO computed the disallowance at ?32,14,000, which was later restricted to ?5,00,000 by the Commissioner (Appeals) under section 154 of the Act. The assessee argued that rule 8D is not applicable before the assessment year 2008-09 and suggested restricting the disallowance to 2% of the dividend income.

The Tribunal agreed that rule 8D is applicable from the assessment year 2008-09 and found the AO's application of rule 8D unsustainable. The Tribunal restricted the disallowance under section 14A to 5% of the dividend income earned during the year.

3. Addition on Account of Reimbursement of Cost Incurred on Behalf of AEs:

The Transfer Pricing Officer (TPO) added ?43,64,399 on account of reimbursement of costs incurred on behalf of AEs, applying a 12.5% mark-up due to lack of supporting evidence from the assessee. The Commissioner (Appeals) upheld this addition.

The assessee submitted additional evidence, including Debit Notes, to demonstrate that the reimbursement was based on actual costs without any mark-up. The Tribunal admitted these additional evidences and restored the issue to the AO for fresh adjudication, providing the Revenue an opportunity to evaluate the evidences.

4. Adjustment Made by the TPO at Entity Level:

The Revenue's appeal and the assessee's cross-objection involved the selection of comparables and the issue of adjustment at the entity level. The assessee argued that the TPO should restrict the adjustment to AE transactions only, not at the entity level. The Tribunal noted that similar issues in the previous assessment year were resolved by restricting the adjustment to AE transactions.

The Tribunal restored the issue back to the AO/TPO to compute the arm's length price by considering only the AE transactions. If the margin falls within ±5% of the comparables, no further adjustment is needed. The Tribunal kept the issues relating to comparables open for future adjudication if necessary.

Conclusion:

The assessee's appeal was partly allowed, the Revenue's appeal was dismissed, and the assessee's cross-objection was partly allowed. The Tribunal directed the AO to make appropriate adjustments and verifications as per the Tribunal's consistent view and legal precedents.