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2021 (2) TMI 264 - AT - Income TaxTP Adjustment - comparable selection - MAM Selection - HELD THAT - It is a fact that assessee had applied RPM method (though it is assessee s contention that inadvertently it is stated to have followed TNMM method in TPO study report) TPO considered the TNMM method to be most appropriate method and proceeded to work out the adjustment accordingly. RPM method has been held to be a most appropriate method for determining of ALP transaction when the assessee is trading in goods without making any value addition. DRP was not justified in rejecting the RPM method followed by assessee. We therefore, set aside the order of TPO (pursuant to the directions of DRP) to compute the ALP by following the TNMM method. Thus the ground of appeal of the assessee is allowed Foreign exchange fluctuation loss in the Profit and Loss account - revaluation of closing stock - Assessee submitted that the foreign exchange loss incurred by the assessee was on account of actual payment to suppliers and reinstatement of books of account at the end of the year - for revaluation of closing stock assessee made provision of obsolete stock and the DRP had mistakenly considered the disallowance of foreign exchange loss made by the assessing officer in the draft order as disallowance of obsolete stock and directed the assessing officer to make disallowance - HELD THAT - It is the contention of the Revenue that the details of the valuation of closing stock was not submitted by the assessee and on the other hand it is assessee s contention that it the method of valuation has been regular followed by the assessee and required details were also submitted before the authorities. We however do not find any findings to the lower authorities on the method of valuation adopted by the assessee and the basis for its write down in the value of stock. Considering the totality of the aforesaid facts, we are of the view that the matter needs re-examination at the end of AO. We therefore restore restore the issue to the file of AO. The AO is directed to verify the submissions of the assessee. This ground of appeal is allowed for statistical purposes.
Issues Involved:
1. Adjustment on account of difference in arm's length price of international transactions. 2. Disallowance on account of foreign exchange fluctuation loss. Detailed Analysis: Issue 1: Adjustment on Account of Difference in Arm's Length Price of International Transactions Background: The assessee, a wholly-owned subsidiary of a German company, engaged in trading telecom network equipment, filed its return declaring a loss. The case was selected for scrutiny, and the Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) to determine the arm's length price (ALP) of international transactions. The TPO proposed an adjustment of ?1,73,97,217/-, which was upheld by the Dispute Resolution Panel (DRP). Arguments by Assessee: - The assessee benchmarked the transaction using the Resale Price Method (RPM) but inadvertently mentioned it as the Transactional Net Margin Method (TNMM) in the Transfer Pricing documentation. - The Gross Profit margin of the assessee was higher than the comparables, suggesting the transactions were at arm's length. - The assessee argued that RPM was the most appropriate method for a simple trader without significant value addition to the products. Arguments by Revenue: - The TPO rejected RPM and applied TNMM, considering the functions performed by the assessee. - The DRP upheld the TPO's decision, noting the assessee performed additional functions like pre and post-sales services. Tribunal's Findings: - The Tribunal noted that RPM is generally the most appropriate method for a trader who resells goods without significant value addition. - It cited various precedents supporting the use of RPM in similar scenarios. - The Tribunal found that the assessee's method had been accepted in previous and subsequent years, and no distinguishing feature justified a different approach for the current year. - The Tribunal directed the AO to compute the ALP using the RPM method, thus allowing the assessee's appeal on this ground. Issue 2: Disallowance on Account of Foreign Exchange Fluctuation Loss Background: The AO disallowed a sum of ?9,91,02,710/- on account of foreign exchange fluctuation loss, holding that the loss was not actually incurred. This was based on the observation that the reduction in the value of inventory was more than 70% and the purchases were made from associated enterprises. Arguments by Assessee: - The assessee argued that the foreign exchange loss was due to actual payments and reinstatement of books at the end of the year. - It contended that the provision for obsolete stock had already been disallowed and offered to tax, and thus no further disallowance was warranted. Arguments by Revenue: - The Revenue maintained that the assessee failed to provide adequate details supporting the valuation of closing stock. - The DRP enhanced the disallowance, noting inconsistencies in the valuation method. Tribunal's Findings: - The Tribunal observed that the method of stock valuation and basis for write-down were not adequately examined by the lower authorities. - It remitted the matter back to the AO for re-examination, directing the AO to verify the assessee's submissions and decide the issue in accordance with the law. - The Tribunal allowed the appeal for statistical purposes, emphasizing the need for the assessee to cooperate by providing necessary details. Conclusion: The Tribunal allowed the appeal on the first issue, directing the AO to use the RPM method for computing the ALP. On the second issue, it remitted the matter back to the AO for re-examination, emphasizing the need for proper verification of the stock valuation method and the basis for the write-down. The appeal was thus allowed for statistical purposes.
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