2016 (4) TMI 663 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on ALP calculation under Section 92CA(3)

The Tribunal upheld the CIT(A)'s decision, affirming the deletion of the addition made by the TPO under Section 92CA(3) of the I.T. Act. It was found that ... Arm's Length Price - Transfer Pricing Officer's adjustment - Comparable Uncontrolled Price method - Net Realizable Value - Valuation of inventories - Slow moving/old stock - Accounting Standard AS-2Slow moving/old stock - Net Realizable Value - Valuation of inventories - Accounting Standard AS-2 - Whether the goods exported to the overseas associated enterprise were old/slow moving stock and whether the assessee's valuation/write-down under AS-2 supported that classification - HELD THAT: - The Tribunal examined the materials considered by the CIT(A) and the TPO, including the assessee's stock records, invoices and the Group policy and notes to accounts evidencing a write-down of inventories to net realizable value. The Tribunal accepted CIT(A)'s finding that the inventory in question was old/slow moving and that the assessee's valuation (toned down amount reflected in the notes to accounts) was in accordance with AS-2 principles for net realizable value. The Tribunal found the Revenue's contention that the goods were not old stock and had been directly sold to a third party to be incorrect, noting the CIT(A)'s assessment of dispatches, timing and documentary records which showed the goods were sold through the overseas associated enterprise and that the time gap between transactions was negligible. [Paras 10]The classification of the inventory as old/slow moving and the assessee's valuation under AS-2 were accepted, supporting the CIT(A)'s finding in favour of the assessee.Arm's Length Price - Transfer Pricing Officer's adjustment - Comparable Uncontrolled Price method - Whether the TPO's determination of Arm's Length Price by applying the assessee's overall gross profit margin (22.64%) to the written-down stock and making an adjustment is sustainable - HELD THAT: - The Tribunal considered the TPO's approach of determining ALP by applying the assessee's gross profit margin and the Revenue's argument that the two-quote evidence did not demonstrate an open market sale. The assessee and CIT(A) relied on evidence showing the sales were effected through the overseas AE and on the suitability of CUP by comparing the assessee's invoices with the AE's subsequent sale to an independent purchaser. The Tribunal found that the CIT(A) had correctly evaluated the evidence, concluded that the goods were sold through the AE, and that the TPO's use of the asserted gross profit to revalue the written-down stock was not justified. Accordingly the Tribunal upheld CIT(A)'s deletion of the adjustment made by the TPO. [Paras 10, 11]The TPO's upward adjustment to determine Arm's Length Price was not sustained; CIT(A)'s deletion of the adjustment was upheld.Final Conclusion: The Revenue's appeal is dismissed; the CIT(A)'s deletion of the TPO's transfer pricing adjustment is upheld and the addition stands deleted. Issues Involved:1. Deletion of addition made on account of adjustment proposed by TPO under section 92CA(3) of the I.T. Act.2. Determination of whether the goods exported were part of slow-moving old stock.3. Determination of the Arm's Length Price (ALP) for the exported goods.4. Adoption of the rate of 8.25% versus 22.64% Gross Profit (GP) for determining ALP.Issue-wise Detailed Analysis:1. Deletion of Addition Made on Account of Adjustment Proposed by TPO under Section 92CA(3) of the I.T. Act:The appeal was filed by the Revenue against the order of CIT(A) which deleted the addition of Rs. 2,87,51,769/-. The TPO had determined the arm's length price of the sale of goods to the associated enterprise (AE) at Rs. 5,73,67,313/- instead of Rs. 2,86,15,544/-, resulting in the adjustment. The CIT(A) deleted this addition, which was contested by the Revenue.2. Determination of Whether the Goods Exported Were Part of Slow-Moving Old Stock:The TPO argued that there was no evidence to show that the goods sold to the AE were old and slow-moving inventory. The assessee had provided invoices and stock details, claiming that the goods were purchased in 2004 and earlier, and were old stock due to the fashion trend changes every six months. The TPO found that the inventory exported to the AE was not the same as that sold to SIMO, a third party, questioning the economic prudence of holding the stock in Singapore for eight months due to high warehousing costs.3. Determination of the Arm's Length Price (ALP) for the Exported Goods:The TPO determined the ALP using the Comparable Uncontrolled Price (CUP) method, considering the gross profit margin of 22.64% earned by the assessee. The TPO concluded that the market value of the inventory sold to the AE should be Rs. 5,73,67,313/-. The CIT(A) found that the goods were indeed old stock and sold through the AE, supporting the assessee's valuation method based on the net realizable value as per AS-2 of the Accounting Standards.4. Adoption of the Rate of 8.25% versus 22.64% Gross Profit (GP) for Determining ALP:The assessee argued that the 22.64% GP margin was unreasonable for old and slow-moving stock, which typically sells at a lower margin. The CIT(A) agreed, noting that the TPO's expectation of earning the same margin on old stock as on normal goods was unreasonable. The CIT(A) also considered that the GP of 22.64% included transactions with related parties and was not solely based on independent transactions. Therefore, the CIT(A) found the CUP method appropriate, comparing the sale invoices of the assessee to the AE with the AE's sale to an independent third party within the same month.Conclusion:The Tribunal upheld the CIT(A)'s decision, finding that the goods were indeed old stock and the sale was through the AE. The CIT(A) correctly applied the CUP method and rejected the TPO's application of the 22.64% GP margin. The appeal by the Revenue was dismissed, affirming the CIT(A)'s order in favor of the assessee.