Tribunal partially allows appeal on Transfer Pricing adjustment, remands Closing Stock Valuation issue for further verification.

The Tribunal partly allowed the appeal, directing a re-evaluation of the Transfer Pricing (TP) adjustment considering underutilization of capacity and other factors. The issue of the difference in Closing Stock Valuation was remanded to the Assessing Officer for further verification.

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Issues Involved:
1. Transfer Pricing (TP) Adjustment
2. Difference in Closing Stock Valuation

Issue-wise Detailed Analysis:

1. Transfer Pricing (TP) Adjustment:

The assessee, engaged in the manufacturing/exporting of diamond-studded jewelry, filed its income return on 24.09.2009. During assessment, the AO identified international transactions with its Associate Enterprises (AEs) and referred the matter to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP). The TPO observed that the assessee had only one AE, M/s. Fantasy Diamond Corporation, USA, and benchmarked the transactions using the TNMM method. The TPO compared the assessee's PLI with twelve comparables and made a TP adjustment of Rs. 3.59 Crores, concluding that the transactions were not at arm's length.

The assessee contested the TPO's findings before the First Appellate Authority (FAA), arguing that the TPO failed to consider the underutilization of capacity and the fact that the assessee was a new unit. The FAA upheld the TPO's decision, stating that the TP regulations did not require proving price manipulation for profit shifting.

Upon appeal, the Tribunal noted that the TPO had compared the assessee with established companies without considering the underutilization of capacity and other relevant factors. The Tribunal emphasized that comparisons should be made between equals and that the assessee's initial year losses were due to fixed costs and underutilization. The Tribunal directed the AO/TPO to reconsider the TP adjustment, factoring in the underutilization of capacity and other relevant factors, and to re-evaluate the comparables.

2. Difference in Closing Stock Valuation:

During assessment, the AO found discrepancies in the closing stock valuation of gold. The assessee reported 4572 grams of gold valued at Rs. 532.80 per gram, whereas the market value was Rs. 1,213 per gram. The AO added Rs. 31,09,895 to the income, suspecting a typographical error in the audit report.

The assessee explained that the discrepancy was due to a typographical error and submitted a revised audit report. However, the AO and FAA rejected this explanation, citing a lack of documentary evidence.

The Tribunal found that the AO should have verified the facts and made further inquiries regarding the audit reports. The Tribunal restored the issue to the AO for verification of the assessee's claim and directed the AO to provide a reasonable opportunity for the assessee to present its case.

Conclusion:

The Tribunal partly allowed the appeal, directing a re-evaluation of the TP adjustment considering underutilization of capacity and other factors, and remanded the issue of closing stock valuation to the AO for further verification. The order was pronounced on 8th July 2016.

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