2012 (4) TMI 359 - AT - Income Tax

Tribunal partially allows appeal, instructs AO on section 154 application & ALP adjustment.

The appeal was partly allowed. The Tribunal directed the AO to dispose of the pending application under section 154 expeditiously and to allow the benefit ... Grievance of the assessee relates to the adjustment of ₹ 1,76,56,164 to the ALP of the international transactions between the assessee and its Associated Enterprises (AEs). The TPO passed an order u/s. 92CA of the Act on 28.10.2009 proposing adjustments of ₹ 2,29,86,949 - The ld. counsel for the assessee submitted that the assessee purchased raw material for ₹ 21.09 crores and adopted TNMM method - It was submitted that as per proviso to section 92C(2) of the Act, an option was available to the assessee for adjustment of +/- 5% variation for the purposes of computing ALP - In the present case, the assessee has not disputed the adjustments u/s. 92CA of the Act, but challenging the working of ALP without giving benefit of the option available under the erstwhile proviso to section 92C(2) of the Act, so it becomes relevant to discuss the provisions contained in the erstwhile proviso to section 92C(2) of the Act, which was inserted by Finance Act, 2002 w.e.f. 1-4-2002 - It is clear that the option is available to the assessee for adjustment of +/- 5% variation for the purposes of computing ALP. - In the present case, it appears that the benefit of +/- 5% adjustment has not been given to the assessee for the reason (as mentioned by the TPO) that sales made by the assessee to third parties were higher in comparison to the rates of sale by AEs to the assessee - Held that: the benefit of +/- 5% intended by the erstwhile proviso to section 92C(2) of the Act was not available to the assessee. Regarding the applicability of the amended provisions in proviso to section 92C(2) - the withdrawal of the interpretation placed in circular No 5 /2010 (supra) on the applicability of the amended proviso is sought to be done away by the Corrigendum dated 30.9.2010 and, therefore, such withdrawal shall be effective only after 30.9.2010, even if such Corrigendum is accepted as valid - Held that: the circulars which are in force during the relevant period are to be applied and the subsequent circulars either withdrawing or modifying the earlier circulars have no application. Held that: no justification in the action of the lower authorities in disentitling the assessee from its claim for the benefit of +/-5% to compute ALP in terms of the erstwhile proviso to section 92C(2) of the Act – Appeal is partly allowed Issues Involved:1. Disallowance of advertisement and sales promotion expenses.2. Disallowance of provision for warranty.3. Adjustment to the arm's length price (ALP) of international transactions.Detailed Analysis:1. Disallowance of Advertisement and Sales Promotion Expenses:- Issue: The Assessing Officer (AO) disallowed Rs. 10,67,308 out of the advertisement and sales promotion expenses, alleging that the appellant failed to substantiate the same with appropriate documentary evidence.- Resolution: Grounds 1 and 1.1 were not pressed by the appellant and thus were dismissed as not pressed.2. Disallowance of Provision for Warranty:- Issue: The AO disallowed the provision for warranty amounting to Rs. 4,57,992, disregarding the directions issued by the Dispute Resolution Panel (DRP) which had directed the AO to allow the claim.- Facts: The appellant, engaged in manufacturing and sale of Dumper Trucks, claimed a provision for warranty but did not add it back to the total income. The AO made an addition of Rs. 4,57,992 due to lack of substantiating documents.- Appellant's Argument: The appellant's counsel submitted that the DRP had allowed this claim and an application under section 154 of the Act was pending before the AO.- Resolution: The Tribunal directed the AO to dispose of the application dated 19.10.2010 under section 154 of the Act expeditiously, considering the DRP's directions.3. Adjustment to the Arm's Length Price (ALP) of International Transactions:- Issue: The AO made an adjustment of Rs. 1,76,56,164 to the ALP of the international transactions between the appellant and its Associated Enterprises (AEs) without according sufficient opportunity of being heard to the appellant.- Facts: The Transfer Pricing Officer (TPO) proposed adjustments of Rs. 2,29,86,949, which were later revised to Rs. 1,76,56,164. The appellant adopted the Transactional Net Margin Method (TNMM) and compared its operating margin with that of comparables like Ashok Leyland Ltd. and Tata Motors Ltd.- Appellant's Argument: The appellant argued that the benefit of +/- 5% should be allowed, which was not considered by the AO/TPO. The appellant also contended that various fixed costs were not deducted while computing the operating cost.- Respondent's Argument: The CIT(DR) argued that the appellant initially did not specify the most appropriate method in its Transfer Pricing (TP) study and later adopted the TNMM method. The CIT(DR) also contended that the amended proviso to section 92C(2) effective from 1.10.2009 should apply, which does not allow the benefit of +/- 5%.- Tribunal's Analysis: The Tribunal noted that the benefit of +/- 5% variation as per the erstwhile proviso to section 92C(2) was available to the appellant. The Tribunal referred to the ITAT Delhi Bench's decision in Sony India (P.) Ltd. and other cases, which supported the appellant's claim.- Resolution: The Tribunal directed the AO to allow the benefit of +/- 5% while computing the ALP in terms of the erstwhile proviso to section 92C(2) of the Act.Conclusion:The appeal was partly allowed. The Tribunal directed the AO to dispose of the pending application under section 154 expeditiously and to allow the benefit of +/- 5% adjustment while computing the ALP of the international transactions.