2021 (11) TMI 140 - AT - Income Tax

Disallowance of expenditure u/s. 40(a)(i) of the Act on Employees Secondment charges and Reimbursement of expenses - HELD THAT - Obsolescence in the inventory was qua the value of stock as on 31-03-2013 and the assessee incorporated the effect of such reduction in the value of inventory by giving an appropriate note as an extraordinary event . The reduction has the effect of representing the condition of stock existing as on 31-03-2013 at its realizable value. It is a case of the existing condition of diminution in the value of inventory as on 31-03-2013. As the exercise of valuing the obsolescence in stock took place after close of the year but before the signing of the balance sheet on 28.5.2013, the assessee depicted it as an extraordinary item by way of a note to accounts and reduced the value of closing stock accordingly - the obsolescence affects the value of inventory as on 31-03-2013, the same was required to be taken into consideration for reflecting true and fair state of affairs of the company as on the balance sheet date - direction of the DRP that the loss should be written off in the F.Y. 2013-14 on the raison d'etre that it was quantified after 31-03-2013, cannot be countenanced. The relevant factor to be considered is the date with reference to which the value of stock is determined and not the date when the exercise of such value determination is carried out. Had it been a case of the assessee valuing its inventory on any date after 31-03-2013 but giving effect in the balance sheet as on 31.3.2013, that would have warranted addition. we are confronted with a situation in which depletion has taken place with reference to the value of inventory on 31-03-2013. We, therefore, hold that the AO was not justified in making addition - Decided in favour of assessee. TP Adjustment - Addition of Corporate Guarantee - HELD THAT - As the assessee own case 2021 (3) TMI 1162 - ITAT PUNE Tribunal determined the Arm's Length fee from furnishing of the corporate guarantee at 0.5% as further increased by any expenditure actually incurred by the assessee in furnishing the guarantee. The ld. DR was fair enough to concede the position in this regard. Having regard to the rival but common submissions and respectfully following the order of the Tribunal for the immediately succeeding assessment year, we set aside the impugned order on this score and remit the matter to the file of AO/TPO for recomputing the ALP of the transaction. In doing so, he will first ascertain the amount of expenditure actually incurred by the assessee in furnishing the five corporate guarantees and thereafter add 0.5% as the service fee for furnishing the guarantee. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in this regard.

Summary

Issues Involved:
1. Disallowance of write-off of obsolete stock.
2. Transfer pricing addition on account of Corporate Guarantee.

Issue-wise Detailed Analysis:

1. Disallowance of Write-Off of Obsolete Stock:

The first issue concerns the disallowance of the write-off of obsolete stock amounting to ?23,12,46,000/-. The assessee, engaged in manufacturing and trading of Pharma packaging products, declared a total loss of ?11,28,91,379/- in its return. The Assessing Officer (AO) notified a draft order with a total income of ?1,52,57,620/-, which was contested by the assessee before the Dispute Resolution Panel (DRP). The DRP noted the discrepancy between the inventory value reported in the balance sheet and the value given to the bank, attributing this to excise duty and obsolete inventory write-off. The DRP disallowed the write-off, asserting that it occurred in FY 2013-14 and not in FY 2012-13, leading to an enhancement by ?23.12 crore in the final assessment order. The assessee challenged this on the grounds of jurisdiction and merits.

The Tribunal examined the jurisdictional issue first, referencing prior Tribunal decisions and the Explanation to section 144C(8) inserted by the Finance Act, 2012, which empowers the DRP to consider any matter arising out of the assessment proceedings, even if not raised in the draft order. The Tribunal upheld the DRP's jurisdiction to enhance the assessment on this issue.

On the merits, the Tribunal noted that the assessee valued its inventory at "Cost or Net realizable value, whichever is less," with the obsolescence quantified by the auditor as of 31-03-2013. The Tribunal found that the obsolescence pertained to the value of inventory as on 31-03-2013, and the write-off was justified in the financial statements for FY 2012-13, despite being quantified after the fiscal year-end but before the balance sheet was signed. Consequently, the Tribunal directed the deletion of the ?23,12,46,000/- addition.

2. Transfer Pricing Addition on Account of Corporate Guarantee:

The second issue involves a transfer pricing addition of ?12,81,49,000/- related to Corporate Guarantee. The assessee provided Corporate Guarantees for its Associated Enterprises (AEs) but did not recover any guarantee fees, except for one transaction. The Transfer Pricing Officer (TPO) benchmarked these transactions at an Arm's Length rate of 1.75%, resulting in a transfer pricing adjustment of ?12.81 crore.

The Tribunal referenced its decision for the assessment year 2014-15, where it had determined an Arm's Length fee of 0.5% for Corporate Guarantees, plus any actual expenditure incurred by the assessee. The Tribunal set aside the impugned order and remitted the matter to the AO/TPO to recompute the Arm's Length Price (ALP) of the Corporate Guarantee transactions, considering the actual expenditure incurred and adding 0.5% as the service fee. The assessee was to be given a reasonable opportunity of hearing.

Conclusion:

The appeal was partly allowed, with the Tribunal deleting the addition related to the write-off of obsolete stock and remitting the transfer pricing issue back to the AO/TPO for recomputation. The order was pronounced in the Open Court on 26th October 2021.