2010 (12) TMI 224 - AT - Income Tax

Tribunal directs reassessment of adjustments, upholds some deletions by CIT(A)

The Tribunal partly allowed the assessee's appeal, directing a reconsideration of adjustments and remanding the issue of closing stock valuation for fresh ... Arm Length Price - Reference to TPO - Benefit of +/- 5% - Scrutiny - CUP or weighted average method - Held that: - The first issue is that the AO did not grant opportunity of being heard to the assessee and made the addition on the basis of Agriwatch data base - The correct position is that the assessment order has merged with the order of the ld. CIT(Appeals) and, therefore, it ceases to have any force to the extent it is contrary to the order of the ld. CIT(Appeals). - There is no submission that the ld. CIT(Appeals) has not granted proper opportunity to the assessee. In this situation, the irregularity, if any, committed by the AO stands cured.Report of TPO and jurisdiction of AO - Held that: - Although the TPO is expected to make a report on arm's length price on receipt of a reference, his failure to do so does not bar the jurisdiction of the AO to determine the arm's length price as in any case the final determination has to be made by the AO only. Thus, failure to act on the part of the TPO cannot lead to the presumption that the order has become time barred. - The cases decided under this chapter and discussed above show that the AO can refer the matter to the TPO for determining arm's length price of an international transaction or he may determine it on his own. Therefore, it is held that the AO was within his jurisdiction when he determined the price of six items of imports made by the assessee. Variation in price - allowance of 5% of arm's length price - the words in the first and second limbs will have to be read to have the same meaning, i.e., the assessee has determined the arm's length price and thereafter declared such price for the purpose of transfer pricing adjustment. Neither such a price is determined nor declared as the transaction has been shown in the books and the return at the purchase price. Therefore, we are of the view that the aforesaid circular is not applicable on the facts and in the circumstances of the case - deciding in favor of assesseeAddition on account of difference in value of closing stock - Held that: - AO valued the stock on the basis of inventory and valuation furnished by the assessee in the course of hearing. However, the assessee took up a plea before the ld. CIT(Appeals) that the assessee has been using weighted average value method. This method has been used in this year, being the first year, and in all subsequent years. - CIT(Appeals) has not examined whether the assessee has followed weighted average value method and whether such method is an accepted method of valuation mandated by AS-2. - matter remanded back for statistical purpose. Issues Involved:1. Adjustment of Rs. 6,40,581 out of Rs. 9,76,369 on account of determination of Arm's Length Price (ALP).2. Permissibility of adjustment after reference to Transfer Pricing Officer (TPO) under Income Tax Act, 1961.3. Deletion of addition of Rs. 3,35,787 out of Rs. 9,76,369 based on ALP worked out by TPO.4. Deletion of addition of Rs. 7,79,812 on account of difference in closing stock.Detailed Analysis:1. Adjustment of Rs. 6,40,581 out of Rs. 9,76,369 on account of determination of Arm's Length Price (ALP):The assessee filed its return showing a loss, which was later scrutinized. The AO noted that in six instances, the price paid by the assessee was in excess of the quotation in the 'Agriwatch' database, resulting in an excess amount of Rs. 9,76,369. The CIT(A) sustained an adjustment of Rs. 6,40,581 after considering the permissible variation of 5% for four transactions. The Tribunal upheld the CIT(A)'s decision, agreeing that the variation within 5% should not warrant adjustment.2. Permissibility of adjustment after reference to Transfer Pricing Officer (TPO) under Income Tax Act, 1961:The assessee argued that the AO intruded into the jurisdiction of the TPO by making adjustments without a report from the TPO. The Tribunal held that the AO is not bound by the TPO's report and can make adjustments independently. The Tribunal rejected the argument that the assessment order became time-barred due to the absence of the TPO's report.3. Deletion of addition of Rs. 3,35,787 out of Rs. 9,76,369 based on ALP worked out by TPO:The CIT(A) deleted the addition of Rs. 3,35,787, finding that the variation in ALP for four invoices was within the permissible limit of 5%. The Tribunal upheld this deletion, agreeing with the CIT(A) that the transactions fell within the tolerance level and thus did not warrant adjustment.4. Deletion of addition of Rs. 7,79,812 on account of difference in closing stock:The AO made an addition of Rs. 7,79,812 based on the difference in the value of closing stock of coffee. The CIT(A) deleted this addition, accepting the assessee's method of weighted average valuation, which was consistently followed. The Tribunal remanded the matter to the AO for fresh consideration, directing the AO to examine the method used by the assessee and decide the matter afresh after giving the assessee an opportunity to be heard.Conclusion:The appeal of the assessee was partly allowed, with the Tribunal directing adjustments to be reconsidered and remanded the issue of closing stock valuation for fresh examination. The appeal of the revenue was treated as partly allowed for statistical purposes, with the Tribunal upholding the CIT(A)'s deletions where appropriate and directing further examination where necessary.