Tax authority accepts internal CUP method, cancels transfer pricing adjustment and allows inventory diminution deduction despite no revised return

ITAT KOLKATA - AT held that the internal CUP method is the most appropriate for determining the arm's-length price of international transactions in the case, preferring internal CUP over external and deleting the transfer-pricing adjustment. The Tribunal also reversed the AO/DRP's disallowance relating to inadvertent addition of negative provisions for diminution in inventory, permitting the deduction despite no revised return having been filed, and deleted the corresponding disallowance.

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Issues Involved:
1. Transfer Pricing Adjustment
2. Corporate Tax (Other Than Transfer Pricing)

Issue-Wise Detailed Analysis:

1. Transfer Pricing Adjustment:

Grounds 1 & 2:
The first issue concerns the adjustment of Rs. 69,30,53,397/- to the total income of the assessee by using the Transactional Net Margin Method (TNMM) instead of the Comparable Uncontrolled Price (CUP) Method as suggested by the assessee. The assessee, a manufacturer of Printed Circuit Boards (PCBs), is a subsidiary of AT&S AG, Austria. The Transfer Pricing Officer (TPO) rejected the assessee's selection of the Associated Enterprise (AE) as the tested party and instead selected the assessee as the tested party. The TPO applied TNMM and identified comparables, resulting in an upward adjustment. The Dispute Resolution Panel (DRP) upheld the TPO's approach, stating that the assessee is more akin to a contract manufacturer. The Tribunal, however, found that the CUP method is more appropriate, as the prices at which the PCBs were sold to the AE matched the prices at which the AE sold to independent customers. The Tribunal emphasized that the CUP method provides the most direct comparison and is preferred over profit-based methods like TNMM.

Grounds 3 to 5:
The Tribunal did not adjudicate these grounds as the primary issue regarding the determination of ALP was resolved in favor of the assessee by applying the CUP method.

2. Corporate Tax (Other Than Transfer Pricing):

Grounds 6 & 7:
The second issue pertains to the disallowance of Rs. 7,53,519/- on account of diminution in the value of inventories. The assessee had inadvertently added back this amount in the computation of income, which should have been deducted. The AO rejected the claim, stating that the assessee did not file a revised return. The DRP upheld the AO's decision. The Tribunal, however, relied on judicial precedents, including the Hon'ble Calcutta High Court and the Hon'ble Supreme Court, which allow rectification of such mistakes without the need for a revised return. The Tribunal directed the deletion of the disallowance.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the deletion of the transfer pricing adjustment of Rs. 69,30,53,397/- by applying the CUP method and also deleted the disallowance of Rs. 7,53,519/- related to the diminution in the value of inventories.

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