2021 (8) TMI 1361 - AT - Income Tax

Tribunal remands issues to DRP for fresh consideration, directs AO to adjust loss claim. Appeal allowed.

M/s. Shindengen India Pvt. Ltd., Versus. The Deputy Commissioner of Income Tax, Circle -6 (1) (1), Bengaluru.

M/s. Shindengen India Pvt. Ltd., Versus. The Deputy Commissioner of Income Tax, Circle -6 (1) (1), Bengaluru. - TMI Issues Involved:1. Addition to total income due to Arm's Length Price (ALP) determination.2. Rejection of Transfer Pricing (TP) study and selection of the tested party.3. Adoption of Comparable Uncontrolled Price Method (CUPM) as the Most Appropriate Method (MAM).4. Computation method of ALP.5. Disallowance of reimbursement of expenses under Sec. 40(a)(ia).6. Non-adjustment of declared loss in computing total income.Detailed Analysis:1. Addition to Total Income Due to Arm's Length Price (ALP) Determination:The first issue concerns the addition of Rs. 21,61,37,271 to the assessee's total income due to ALP determination under Section 92 of the Income Tax Act, 1961. The assessee, a subsidiary of Shindengen Electric Mfg Co., Ltd, Japan, engaged in trading power system products and electrical components, entered into international transactions with its Associated Enterprise (AE). The dispute revolves around the ALP determination for the purchase of stock-in-trade from the AE, which the Transfer Pricing Officer (TPO) benchmarked using the Comparable Uncontrolled Price Method (CUPM), leading to the addition.2. Rejection of Transfer Pricing (TP) Study and Selection of the Tested Party:The TPO rejected the assessee's TP study, which used the Cost Plus Method (CPM) and selected the foreign AE as the tested party. The TPO argued that the assessee was the simpler party with lesser risks and had reliable data for comparables, thus should be the tested party. The DRP upheld the TPO's rejection without providing detailed reasons or addressing the assessee's objections regarding the selection of the tested party.3. Adoption of Comparable Uncontrolled Price Method (CUPM) as the Most Appropriate Method (MAM):The TPO proposed and adopted CUPM, comparing the prices of stock-in-trade purchased by the assessee with the prices at which they were sold to third parties. The assessee contended that CUPM was incorrectly applied as it did not involve comparable uncontrolled transactions. The DRP did not address the objections regarding the adoption of CUPM as the MAM.4. Computation Method of ALP:The TPO computed the ALP by comparing the average purchase and sale prices of products and applying gross margins to determine the ALP, effectively using a distorted version of the Resale Price Method (RPM). The assessee argued that this approach violated the principles of CUPM and RPM, as it did not involve any comparable uncontrolled transactions. The DRP's order lacked detailed reasoning and failed to address these objections.5. Disallowance of Reimbursement of Expenses under Sec. 40(a)(ia):The assessee challenged the disallowance of Rs. 20,81,884 as reimbursement of expenses, arguing that these were purely cost-to-cost reimbursements with no income element, thus not subject to tax deduction at source. The DRP upheld the disallowance based on the Supreme Court's decision in Transmission Corporation of AP Ltd., which the assessee argued was explained in a later decision (GE Technologies) to not require tax deduction for non-taxable reimbursements.6. Non-Adjustment of Declared Loss in Computing Total Income:The assessee raised an additional ground regarding the non-adjustment of the declared loss of Rs. 3,58,98,221 in the computation of total income. The AO determined the total income without adjusting this declared loss, leading to the additional ground of appeal. The Tribunal admitted this ground for adjudication and directed the AO to consider the claim and make appropriate adjustments.Conclusion:The Tribunal remanded the issues back to the Dispute Resolution Panel (DRP) for fresh consideration, emphasizing the need for a speaking order addressing the specific objections raised by the assessee. The Tribunal also directed the AO to examine the claim regarding the non-adjustment of declared loss and make necessary adjustments. The appeal was treated as allowed for statistical purposes.