Tribunal directs verification of arm's length price for intra-group services, allows appeal partly

M/s. Avery Dennison (I) Pvt. Ltd. Versus ACIT, Circle -3 (2), New Delhi

M/s. Avery Dennison (I) Pvt. Ltd. Versus ACIT, Circle -3 (2), New Delhi - TMI Issues Involved:

1. Validity of the assessment order.
2. Transfer pricing adjustment for intra-group services.
3. Jurisdictional error in referring the matter to the Transfer Pricing Officer (TPO).
4. Best judgment assessment under Section 144 of the Income Tax Act.
5. Addition on account of fall in Gross Profit (GP) ratio.
6. Disallowance under Section 37(1) of the Income Tax Act.

Detailed Analysis:

1. Validity of the Assessment Order:
The grounds raised by the assessee regarding the validity of the assessment order were general in nature and not specifically adjudicated. The counsel did not press these grounds, and they were dismissed accordingly.

2. Transfer Pricing Adjustment for Intra-group Services:
The primary issue was the transfer pricing adjustment of Rs. 25,19,80,074 for intra-group services. The assessee, a subsidiary of Avery Dennison Corporation, USA, had reported 31 international transactions, with the TPO accepting all except those related to intra-group services in the Pressure Sensitive Materials (PSM) and Retail Branding Information Solutions (RBIS) segments. The TPO and DRP found the services to be in the nature of shareholder services, duplicative services, or services providing incidental benefits, and thus, not satisfying the arm's length principle. The Tribunal noted that similar adjustments had been deleted in preceding years by the Tribunal and affirmed by the High Court. However, for the assessment year 2012-13, the Tribunal had restored the issue to the AO/TPO for verification of the rendition of services. Following this precedent, the Tribunal restored the matter to the AO/TPO for verification, directing that the need and benefit tests were already satisfied, and the focus should be on the actual rendition of services.

3. Jurisdictional Error in Referring the Matter to the TPO:
The assessee did not press the grounds related to the jurisdictional error in referring the matter to the TPO. These grounds were dismissed as infructuous.

4. Best Judgment Assessment under Section 144:
The AO had made a best judgment assessment under Section 144, citing the assessee's failure to justify the fall in GP ratio. However, the Tribunal observed that the AO had verified the bills and invoices and found them in order. The AO had not invoked Section 145(3) or rejected the books of accounts. The Tribunal held that without rejecting the books of accounts, the AO could not make an addition based on the fall in GP ratio. The addition was directed to be deleted.

5. Addition on Account of Fall in Gross Profit (GP) Ratio:
The AO had made an addition of Rs. 39,55,27,776 due to a fall in the GP ratio, estimating the GP rate based on the average of the last three years. The Tribunal noted that the AO had verified the books and found them in order. Without rejecting the books of accounts, the AO could not make an addition based on the GP ratio. The Tribunal directed the deletion of this addition.

6. Disallowance under Section 37(1) of the Income Tax Act:
The AO had made a protective disallowance of Rs. 25,19,80,074 under Section 37(1), considering the intra-group services not incurred wholly and exclusively for business purposes. The Tribunal observed that no such disallowance was made in earlier or subsequent years, and the Revenue had accepted this position. Applying the rule of consistency, the Tribunal directed the deletion of the disallowance.

Conclusion:
The Tribunal restored the matter of determining the arm's length price of intra-group services to the AO/TPO for verification and directed the deletion of the additions made on account of the fall in GP ratio and the protective disallowance under Section 37(1). The appeal was partly allowed for statistical purposes.