2022 (5) TMI 1519 - AT - Income Tax

Appellate Tribunal reverses CIT(A) decisions on transfer pricing and loose tools, emphasizing method adherence and consistency.

M/s. Mersen India Pvt. Ltd. (Formerly known as Carbone Lorraine India Pvt. Ltd.) Versus. Deputy Commissioner of Income-tax Circle-4 (1) (2) Bangalore

The Appellate Tribunal set aside the Ld CIT(A)'s orders, directing a reexamination of the transfer pricing adjustment for management services and the ... TP Adjustment - TPO has accepted that the international transactions at 'entity level' is at arm’s length - ALP of international transactions - A.R has contended that the TPO could not have benchmarked management fee paid by the assessee separately - HELD THAT:- It is well settled proposition of law that the ALP of international transactions could be determined by TPO under one of the prescribed methods only. However, in the instant case, TPO has applied benefit test and determined ALP of payment of management services as NIL. Hence the approach of the TPO is not in accordance with the mandate of law. When the assessee is making identical payment every year for identical services provided by AE and the revenue has taken a particular stand with regard to the services so provided by the AE, in our view, there is no scope for applying the principle of res-judicata in other years for this matter for taking different stand in others for the identical payments made by the assessee. It is not clear as to whether the decision rendered by AAR against the assessee has attained finality or not. Accordingly, on a conspectus of the matter, we are of the view that the issue relating to transfer pricing adjustment in respect of three types payments referred in the table issue needs to be examined in the light of contentions of the assessee discussed supra at the end of TPO/AO. Tax authorities should first examine the contention of the assessee that there is no requirement of making separate bench marking for these services, when they are aggregated and the ALP of international transactions were accepted to be at arm’s length. The AO/TPO should also take into consideration the decision rendered by AAR in the assessee's own case, if it has attained finality. After carrying out these exercises, if the AO/TPO comes to the conclusion that the bench marking is still required to be made, then the TPO shall determine ALP of these transactions under one of the prescribed methods only. The assessee shall be given adequate opportunity of being heard. Disallowance of write of loose tools - HELD THAT:- We notice that the co-ordinate bench of Tribunal has considered an identical issue in the assessee's own case in AY 2008-09 [2020 (12) TMI 387 - ITAT BANGALORE] - we set aside the order passed by Ld CIT(A) on this issue in AY 2012-13 and 2013-14 and direct the AO to delete this disallowance. Issues:- Challenge to transfer pricing adjustment for management services- Challenge to disallowance of writing off loose toolsTransfer Pricing Adjustment for Management Services:The assessee challenged the decision of Ld CIT(A) confirming the transfer pricing adjustment for fee paid for management services, with the TPO determining the ALP as NIL. The TPO questioned the necessity of the services received from the AE, lack of evidence of services rendered, absence of cost-benefit analysis, and lack of quantification of services at arm's length. The Ld CIT(A) accepted Arm's Length Price for some items but upheld the adjustment for others. The Appellate Tribunal noted that the TPO applied the benefit test and determined the ALP as NIL, which was not in accordance with the prescribed methods under the law. The Tribunal also considered the necessity of segregating the transaction and the AAR's decision in a previous case. The Tribunal directed the tax authorities to reexamine the issue based on the assessee's contentions and previous rulings.Disallowance of Writing off Loose Tools:In AY 2012-13 and 2013-14, the assessee contested the disallowance of writing off loose tools. The Tribunal referred to a previous ruling in AY 2008-09 where a similar disallowance was deleted. The Tribunal agreed with the method adopted by the assessee in valuing loose tools as inventories awaiting use in the production process. Following the previous decision, the Tribunal directed the AO to delete the disallowance for these years. Consequently, all appeals of the assessee were treated as allowed.In conclusion, the Appellate Tribunal set aside the Ld CIT(A)'s orders on both issues, directing a reexamination of the transfer pricing adjustment for management services and the deletion of the disallowance of writing off loose tools based on previous rulings. The Tribunal emphasized the need for adherence to prescribed methods in determining ALP and consistency in decision-making based on past cases.