2010 (5) TMI 845 - AT - Income Tax

Tribunal allows appeal on CENVAT credit & interest, upholds Cost Plus Method for ALP with volume discount adjustments

M/s. Diamond Dye Chem Ltd. Versus Deputy Commissioner of Income Tax-Rg. 6 (2) Mumbai

The Tribunal allowed the appeal for statistical purposes, providing relief on the inclusion of CENVAT credit in the closing stock and partial relief on ... TP Adjustment - Selection of CPM or TNMM as MAM - HELD THAT:- the assessee is manufacturing Optical Brightening Agents (OBAs) which are being used in textile and paper industries and which are exported by the assessee to the AEs as well as Non-AEs. the cost data for the manufacture of products are available as per cost audit report, the reliability there of is assured and therefore Cost Plus Method is the most appropriate method. In this view of the matter and in view of the detailed discussion by the learned CIT(A), we hold that the Cost Plus Method (CPM) is the most suitable method for the international transactions with AEs in the instant case. Since the exports to AEs at ₹ 34,32,62,520 is almost six times of the exports to Non-AEs which is at ₹ 5,58,47,305, therefore, an adjustment on account of volume discount should be allowed to the assessee in order to carry out a prudent transfer pricing analysis. We find from the orders of the TPO that similar volume discounts were allowed by him for the A.Ys. 2003-04 and 2004-05. Since the methodology for computation of volume discount for the A.Y. 2002-03 is the same as that was adopted for the A.Y. 2003-04 and which has already been verified by the TPO and accepted by the CIT(A), therefore, in our opinion, volume discount should be allowed to the assessee for the A.Y. 2002-03 on the basis of methodology accepted by the TPO and the CIT(A) in the subsequent year. With these observations, we restore this issue to the file of the AO for calculating the necessary volume discount and give appropriate relief to the assessee on the basis of the methodology adopted by him in the sub sequent years. The grounds raised by the assessee are partly allowed. In the result, the appeal filed by the assessee is partly allowed for statistical purposes. Issues Involved:1. Enhancement on account of Modvat Credit to the closing stock.2. Classification of interest receipt as income from business.3. Adoption of Cost Plus Method (CPM) instead of Transaction Net Margin Method (TNMM) for determining the arm's length price (ALP).Detailed Analysis:1. Enhancement on account of Modvat Credit to the Closing Stock:The primary issue was whether the unutilized CENVAT credit should be included in the closing stock as per Section 145A of the Income-tax Act, 1961. The Assessing Officer (AO) added Rs. 23,95,132 to the closing stock, which the CIT(A) enhanced to Rs. 26,64,545. The Tribunal found merit in the assessee's argument that the inclusion of CENVAT credit has a nil effect on the profit calculation. The Tribunal noted that similar issues had been resolved in favor of the assessee in the preceding assessment year, where it was held that unless the excise duty actually paid or incurred is related to bringing the goods to the place of location and condition on the date of valuation, no addition should be made. Consequently, the Tribunal set aside the CIT(A)'s order and allowed the grounds raised by the assessee.2. Classification of Interest Receipt as Income from Business:The assessee argued that the interest receipt of Rs. 76,747 should be treated as income from business and not be reduced under clause (baa) of Explanation to Section 80HHC. The Tribunal found that the interest from overdue payments from customers (Rs. 41,056) partakes the character of turnover and should be eligible for deduction under Section 80HHC. However, other interest incomes (bank interest on deposits, interest on fixed deposits, and water deposits) were not related to the export activity and thus not eligible for the deduction. The Tribunal remanded the issue to the AO to verify the nature of the overdue interest from customers and allow necessary relief.3. Adoption of Cost Plus Method (CPM) instead of Transaction Net Margin Method (TNMM):The assessee contested the adoption of CPM by the Transfer Pricing Officer (TPO) and CIT(A) for determining the ALP of exports to Associated Enterprises (AEs). The assessee argued that TNMM was the most appropriate method due to functional and risk differences between exports to AEs and Non-AEs. The Tribunal upheld the CIT(A)'s decision to use CPM, noting that the cost data for the manufacture of products were reliable and assured by cost audit reports. However, the Tribunal found merit in the assessee's argument for a volume discount adjustment, as the exports to AEs were significantly higher than to Non-AEs. The Tribunal directed the AO to calculate the necessary volume discount using the methodology accepted in subsequent years (A.Y. 2003-04 and 2004-05) and provide appropriate relief.Conclusion:The Tribunal allowed the appeal for statistical purposes, providing relief on the inclusion of CENVAT credit in the closing stock and partial relief on the classification of interest receipts. It upheld the use of CPM for determining ALP but directed the AO to allow volume discount adjustments. The appeal was thus partly allowed.