2018 (5) TMI 2090 - AT - Income Tax

Appeal partly allowed for statistical purposes with directions on set-off of losses

The appeal was partly allowed for statistical purposes, with specific directions for the AO to verify and allow set-off of brought forward losses. The ... TP Adjustment - adjustment made on international transactions of the assessee with its Associated Enterprises - HELD THAT:- Hon’ble Apex Court has admitted an appeal filed by Revenue in the case of CIT vs. Firestone International P. Ltd [2016 (8) TMI 1285 - SC ORDER] against a judgment of Hon’ble Bombay High Court [2015 (6) TMI 1123 - BOMBAY HIGH COURT] affirming the view taken by the Tribunal that adjustments on arms length transactions had to be restricted to the value of international transactions with Associated Enterprises. However no stay was granted by Hon’ble Apex Court. Hence as on date the judgment of Hon’ble Bombay High Court, is operative DRP fell in error in giving a direction to do an upward adjustment on aggregate of international transactions of the assessee without restricting it to the proportion of such transactions with its Associated Enterprises. Such directions of the ld. DRP are set aside. Ground No.6 of the assessee stands allowed. Disallowance of custom duty and revenue loss - economic adjustment for custom duty adjustment and was not pressing for such adjustment on account of revenue loss - HELD THAT:- For making such adjustment, assessee should be able to demonstrate that higher import content was necessitated by some extraordinary circumstances which was beyond its control. Just because there is a difference in proportion of imports between comparables and the assessee would not by itself, in our opinion, warrant any adjustment on profits unless assessee is able to show some extraordinary circumstances which necessitated higher imports when compared to the selected comparables. Assessee in the case before us, has been unable to demonstrate that raw materials purchased after payment of custom duty was of a similar nature as purchased by the comparable entities and there was a substantial difference in custom duties and excise duties on such material. Thus, in our opinion, assessee was rightly denied the adjustment sought by it for custom duty on raw materials. Grounds Of the assessee stand dismissed. Carry forward losses from earlier assessment years being not allowed a set off while computing the income for the impugned assessment year - HELD THAT:- If the assessee had claimed set off of any brought forward loss from earlier years, which were determined in the regular assessment for such assessment years, then set off could be allowed. We direct the ld. Assessing Officer to look into this issue and provide, if required, appropriate relief to the assessee. Ground allowed for statistical purpose. Issues Involved:1. Adjustment to arm's length price (ALP) of international transactions.2. Rejection of transfer pricing documentation.3. Non-disclosure of search process for comparable companies.4. Disregard of pricing policy and alternate benchmarking approach.5. Restriction of transfer pricing adjustment to the value of international transactions.6. Denial of economic adjustments for customs duty and revenue loss.7. Treatment of royalty expenses.8. Inclusion/exclusion of comparables.9. Adjustment of customs duty, freight, and insurance expenses.10. Rejection of prior years' financial data.11. Non-application of +/- 5% benefit under Section 92C.12. Non-consideration of brought forward losses.13. Levy of interest under Section 234B.Detailed Analysis:1. Adjustment to Arm's Length Price (ALP) of International Transactions:The assessee contested the adjustment of INR 31,87,73,135 made by the TPO/AO and DRP to the ALP of its international transactions. The Tribunal noted that the TPO had restricted the adjustment to the proportion of international transactions (21.8%) to the total cost, which was deemed correct. The DRP's direction to make a global adjustment was found to be erroneous and against the mandate of Section 92 read with Section 92B(1) of the Act. The Tribunal relied on judgments from the Delhi and Bombay High Courts, which supported restricting adjustments to international transactions with Associated Enterprises (AEs) only. Thus, the Tribunal allowed the assessee's ground, setting aside the DRP's directions.2. Rejection of Transfer Pricing Documentation:The assessee argued that the TPO/AO and DRP erred in rejecting its detailed transfer pricing documentation without providing cogent reasons. However, this ground was considered general in nature and did not merit specific adjudication.3. Non-Disclosure of Search Process for Comparable Companies:The assessee claimed that the TPO/AO and DRP did not provide complete details of the search process for comparable companies. This ground was also considered general and not specifically adjudicated.4. Disregard of Pricing Policy and Alternate Benchmarking Approach:The assessee contended that the TPO/AO and DRP disregarded its pricing policy and alternate benchmarking approach without providing reasons. This ground was considered general and not specifically adjudicated.5. Restriction of Transfer Pricing Adjustment to Value of International Transactions:The Tribunal upheld the TPO's method of restricting the adjustment to the proportion of international transactions to the total cost, finding the DRP's direction for a global adjustment incorrect. The Tribunal set aside the DRP's directions, allowing the assessee's ground.6. Denial of Economic Adjustments for Customs Duty and Revenue Loss:The assessee sought economic adjustments for customs duty and revenue loss. The Tribunal noted that the assessee restricted its argument to customs duty adjustment only. The Tribunal found that the assessee failed to demonstrate extraordinary circumstances necessitating higher imports compared to comparables. Thus, the Tribunal upheld the denial of customs duty adjustment and dismissed the grounds related to economic adjustments.7. Treatment of Royalty Expenses:The assessee argued that the TPO/AO and DRP erred in treating royalty expenses as operating in nature and including them in the cost base for computing ALP. This ground was not specifically argued and was dismissed.8. Inclusion/Exclusion of Comparables:The assessee contended that the TPO/AO and DRP included/excluded companies based on unreasonable comparability criteria. This ground was not specifically argued and was dismissed.9. Adjustment of Customs Duty, Freight, and Insurance Expenses:The assessee argued that expenses related to customs duty, freight, and insurance should be excluded from the value of international transactions. This ground was not specifically argued and was dismissed.10. Rejection of Prior Years' Financial Data:The assessee contended that the TPO/AO and DRP erred in rejecting the use of financial data from prior years. This ground was not specifically argued and was dismissed.11. Non-Application of +/- 5% Benefit under Section 92C:The assessee argued that the TPO/AO and DRP erred in computing ALP without giving the benefit of +/- 5% as per Section 92C. This ground was not specifically argued and was dismissed.12. Non-Consideration of Brought Forward Losses:The assessee claimed that the AO disregarded brought forward losses while computing gross total income. The Tribunal directed the AO to verify and allow set-off of brought forward losses if determined in regular assessments for earlier years. This ground was allowed for statistical purposes.13. Levy of Interest under Section 234B:The assessee argued against the levy of interest under Section 234B, stating that additions to income were unanticipated. The Tribunal noted that this issue was consequential and did not require specific adjudication.Conclusion:The appeal was partly allowed for statistical purposes, with specific directions for the AO to verify and allow set-off of brought forward losses. The Tribunal upheld the TPO's method of restricting adjustments to the proportion of international transactions and dismissed grounds related to economic adjustments, royalty expenses, and other issues not specifically argued.