2016 (8) TMI 856 - AT - Income Tax

Tribunal allows appeal, directs deletion of transfer pricing adjustment for capital assets purchase. Expert opinion crucial.

The Tribunal partly allowed the appeal, directing the deletion of the addition made on account of the transfer pricing adjustment for the purchase of ... Transfer Pricing - Arm's Length Price - Comparable Uncontrolled Price (CUP) method - Reference to Valuation Officer (DVO) for valuation of capital assets - Reliance on independent valuer / valuation certificate - Acceptance of customs valuation as relevant evidence - Dispute Resolution Panel (DRP) duty to appreciate valuation evidenceTransfer Pricing - Arm's Length Price - Reference to Valuation Officer (DVO) for valuation of capital assets - Reliance on independent valuer / valuation certificate - Comparable Uncontrolled Price (CUP) method - Acceptance of customs valuation as relevant evidence - Validity of upward transfer-pricing adjustment made by TPO in respect of price paid for second hand capital asset purchased from an associated enterprise and correctness of rejecting the independent valuation certificate without reference to Valuation Officer. - HELD THAT: - The Tribunal examined whether the TPO could discard the assessee's independent Chartered Engineer's valuation (which was accepted by customs at import) and determine ALP by applying CUP and marking up using an extrapolated arithmetic mean of operating margins of Indian manufacturers. The Tribunal held that the TPO, not being an expert valuer, erred in rejecting the independent valuation without referring the matter to the Valuation Officer as provided by the statutory scheme. The TPO's approach of extrapolating average operating margins of Indian manufacturers and applying an arbitrary markup to the book/W.D.V. of the AE was improper. The DRP also failed to take a holistic view and restricted itself to one aspect (comparison with price of new machines) without appreciating valuation evidence and the accepted customs valuation. Reliance on authorities was placed to show that where an independent valuation (accepted at import) is available, and the valuer's report has not been satisfactorily rebutted by expert enquiry, the correct course is reference to the DVO; absent such reference the TPO's mechanical adjustment is unsustainable. Having regard to these considerations and precedents, the Tribunal set aside the adjustments made by the authorities below and directed deletion of the addition arising from the upward valuation adjustment. [Paras 7, 11, 12]Adjustment by the TPO in respect of valuation of the capital asset is set aside; the addition made on account of that adjustment is deleted and ground no. 3 is allowed.Final Conclusion: The appeal is partly allowed: the transfer pricing upward adjustment in respect of the second hand capital asset is set aside and the corresponding addition deleted; other grounds were not pressed or were withdrawn and dismissed accordingly. Issues Involved:1. Validity of assessment order2. Payment of divisional recharge3. Transfer Pricing - Purchase of Capital Assets4. Payment of royaltyIssue-wise Detailed Analysis:1. Validity of Assessment Order:The assessee raised a challenge to the validity of the assessment order but did not press this ground during the appeal. Consequently, the Tribunal dismissed this ground as not pressed.2. Payment of Divisional Recharge:The assessee initially contested the findings of the lower authorities regarding the payment of divisional recharge but subsequently withdrew this ground. Therefore, the Tribunal dismissed this ground as withdrawn.3. Transfer Pricing - Purchase of Capital Assets:The primary issue adjudicated was the transfer pricing adjustment related to the purchase of capital assets. The TPO had rejected the valuation provided by the assessee, which was based on a certificate from an independent Chartered Engineer, and instead applied the Comparable Uncontrolled Price (CUP) method. The TPO used the written down value (WDV) of the assets in the books of the AE and added an ad-hoc mark-up to determine the arm's length price, resulting in an upward adjustment of Rs. 1,69,52,440.The assessee argued that the valuation certificate was accepted by the Customs Department and that the TPO should have referred the matter to the Departmental Valuation Officer (DVO) if there were doubts about the valuation. The Tribunal agreed with the assessee, noting that the TPO should have sought expert opinion from the DVO rather than making arbitrary adjustments.The Tribunal cited several precedents, including:- Chennai Bench of the Tribunal in M/s. Coastal Energy Pvt. Ltd. Vs. The Assistant Commissioner of Income Tax: The Tribunal held that the value adopted by customs authorities should be accepted as it is based on scientifically formulated methods.- Hyderabad Bench of the Tribunal in Tecumseh Products India (P.) Ltd. Vs. Assistant Commissioner of Income Tax: The Tribunal emphasized that the TPO should refer the machinery to a valuation officer if there is any doubt.- Mumbai Bench of the Tribunal in Asstt. Commissioner of Income Tax Vs. M/s. Koch Chemical Technology Group (India) Limited: The Tribunal held that the TPO must refer to the DVO for valuation and cannot arbitrarily determine the value.The Tribunal concluded that the TPO erred in extrapolating the average operating margin of Indian manufacturers and applying the CUP method. It set aside the findings of the authorities below and directed the Assessing Officer to delete the addition made on account of the adjustment in the value of the capital asset.4. Payment of Royalty:The assessee also initially raised an issue regarding the payment of royalty but subsequently withdrew this ground. The Tribunal dismissed this ground as withdrawn.Conclusion:The appeal was partly allowed. The Tribunal directed the deletion of the addition made on account of the transfer pricing adjustment for the purchase of capital assets, while dismissing the other grounds as either not pressed or withdrawn.