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TMI Blog2018 (1) TMI 728X X X X Extracts X X X X X X X X Extracts X X X X ..... sated 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 X X X X Extracts X X X X X X X X Extracts X X X X ..... following IT. s: SN. Nature of International transaction Value in (Rs. ) i. Advertising spend in terms of Art. 6. 4 of 'Distribution Agreement'(04. 10. 01) ₹ 2, 07, 82, 059/-debited in P&L as ' Advertising & sales promotion'. ii. Market information report in terms of Art 11 of the above agreement Not quantified iii. Claim of damaged goods Claimed in Profit & Loss account ₹ 6, 48, 60, 993/- as amount of Write down on carrying value of traded goods. During the TP proceedings, he observed that the assessee had claimed ₹ 6. 48 crores under the head write down of traded goods. He required the assessee to file explanation in that regard. It was stated that, during the year, stock of ₹ 6, 48, 60, 993/-declared as unfit for sale and was destroyed. The TPO directed the assessee to explain as to whether the agency agreement entered with the AE required it to destroy the branded products. After going through the Distribution Agreement(DA). dtd. 16/7/2001, the TPO held that it was the responsibility the assessee to notify defects in the products to the AE, that the defective products were to be kept for inspection of AE for two years, that it had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y devoid of merit, that write-down could not be ignored for calculating Gross Profit margin that there was no separate debit note. With regard to the assessee's alternative argument that write-down should be considered to reduce the profit margin of the earlier years right from FY. 2004 up to FY. 2009, the DRP held that the argument was totally without any merit, that the events happened in the previous year had to be considered, that accounts could not be re-casted according to convenience of the AO/assessee, that the assessee, in its audited balance sheet, had written down the carrying cost of traded goods during the year under appeal, that there was no basis to notionally apportion the same to various years in the past and then contend that even after write-off the profits were at arm's length in all those earlier years, that no such contention had ever been raised by the assessee in those earlier years, that the same was an afterthought. 3. 2. The DRP also considered the other alternate claim made by the assessee. It was argued that if at all any adjustment was to be made, it should be restricted to the sum of ₹ 3. 01 crores by adjusting the value of imported goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 30. 03. 2012) and Accounting Standard (AS)-5. The Departmental Representative (DR) argued that transaction in question was an IT, that no details of damaged stock was provided, that it was not an extraordinary item which had to be excluded, that the TPO had rightly applied RPM for determining the ALP of the transaction, that provisons of section 92(2)(b) were applicable. He relied upon the case of Thomas Cook (India)Ltd. (70 taxmann. com 322) 4. We find that the assessee had written off goods worth ₹ 6. 28 crores during the year under appeal, that it had not shown the transaction as an IT, that the TPO and the DRP were of the view that stock written off was an IT and that ALP of the transaction had to be determined, that they referred to the clause 25 of the DA entered in to by the AE with the assessee, that the assessee on the basis of same agreement contended that same proved the stand taken by it. In our opinion, it would be useful to go through the relevant portion of the agreement i. e. Clause 25. 2 of the agreement. As per the said clause the assessee had to notify the any claim regarding quantity, defects in quality, lack of compliance upon arrival of the products ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 4. 1. Obsolence of items like sunglasses or readymade garments or footwares or for that matter any product related to fashion is a well known fact of commercial and business world. Shelf-life of such items is not very long and with the passage of time they become 'out of fashion' items. It is also a known fact in the business of sunglasses the salesmen use eyewares for demonstration purpose and that such an item would also become unsalable. To clear such inventories businessmen have to find some way. We find that in the case under consideration, the assessee decided to write off and destroy the obsolete stock-in-trade. In its meeting the Board of Directors of the assessee-company passed a resolution regarding writing off of goods. Age-wise inventory of the obsolete stock was prepared before writing off the stock that remained unsold. It had furnished the evidence of destroying the goods before the departmental authorities. Here, we would like to refer to the judgment of the Hon'ble Delhi High Court in the case of Federal Mogul Automative Products (India)Pvt. Ltd. (supra) and it reads as under: "1. This appeal by the Revenue is directed against an order dated 25th March. 2015 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to be excluded for the cost of the Assessee in computing its operating margin. Since the said item occurred only in KOEL. the CIT (A) was of the opinion that its margin needed to be re-worked. The rationale for this was that the same treatment had to be accorded to the tested party i. e. the Assessee and its comparables. Since the Assessee's ALP was above the margin of the comparables, the proviso to Section 92 C (2) of the Act was held not to apply. 5 Having heard the learned counsel for the Revenue, the Court is unable to discern any legal infirmity in the approach of the CIT (A) which was upheld by the ITAT in the impugned order. It is sought to be suggested that the Assessee makes a provision for stock obsolescence year after year and, therefore, this could not be treated as 'extraordinary' or 'non-recurring'. However, when one peruses the order of the CIT (A), it is seen that the question was not whether the Assessee was claiming it only as a one-time measure but whether it was gaining any undue advantage in using this device as a measure for avoiding tax. Ultimately, the entire exercise of determining ALP for international transactions is to en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ier AY. s. 4. 3. Indian Parliament had introduced the TP provisions in the statute to curb the malpractices of those assessees who would shift profit outside India and would pay no or less taxes in India by showing lesser market value of goods sold/purchased or services offered/availed to/from their AE. s. The basic intention behind the provisions of Chapter X is to ensure that assessees should purchase or sell their goods/services at the rates they would pay or charge from the independent third parties. Fair market value should prevail in the transactions that are entered in to by the AE. s. Income tax Rules, 1962 (Rules) stipulate the methodology for computation of TP adjustments. As per the existing Rules for determining the APL of a transaction, the TPO. s should use any of the six methods provided therein. He applied CUP as the most appropriate method for making adjustment to the income of the assessee. But in our opinion 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. Considering the above, we are of the opinion that the DRP was not justified in conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as mandatory for the TPO to compute ALP by applying one of the prescribed methods. The DR supported the order of the DRP and stated that the DRP had given a substantial relief to the assessee. 5. 3. We have heard the rival submissions and perused the material before us. We find that the 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 mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessment Order under Section 144C of the Act on the basis of the order of the TPO. 5. Being aggrieved, the respondent assessee approached the Dispute Resolution Panel (DRP). However, the view of the TPO was upheld by the DRP. 6. On appeal, the Tribunal on interpretation of Section ;92B (2) of the Act, as in force during the subject assessment year concluded that the transaction would not be covered by the definition of International Transaction. This inter alia on the ground that the prior to amendment to Section 92B(2) of the Act w. e. f. 1st April, 2015 such a transaction was not deemed to be an International Transaction. Further, the impugned order also examined the issue on facts and and held that even if the Revenue's interpretation is accepted, no addition on account of Arms Length Price. . (ALP) is warranted. Moreover, it also held that the ALP was sought to be determined by a method not prescribed under Section 92C of the Act and the prayer for restoration to the TPO to apply the prescribed method was rejected. (emphasis by us). 7. The grievance of the Revenue as evident from the question formulated is only in respect of interpretation of Section 92B of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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