2019 (6) TMI 538 - AT - Income Tax

Tribunal directs re-examination of arm's length price adjustments and business loss set-off

Smith And Nephew Healthcare Pvt. Ltd. Versus Income Tax Officer Ward–11 (2) (3), Mumbai

Smith And Nephew Healthcare Pvt. Ltd. Versus Income Tax Officer Ward–11 (2) (3), Mumbai - TMI Issues Involved:1. Addition made on account of adjustment to the arm's length price of the import of capital assets.2. Addition made on account of adjustment to the arm's length price of management service charges.3. Non-allowance of set-off of brought forward business loss.Issue-wise Detailed Analysis:1. Addition made on account of adjustment to the arm's length price of the import of capital assets:The assessee, an Indian company engaged in marketing and distribution of advanced medical equipment and healthcare products, challenged the adjustment of Rs. 1,67,50,634 made to the arm's length price of imported capital assets. The Transfer Pricing Officer (TPO) rejected the assessee's benchmarking using the Transactional Net Margin Method (TNMM) and adjustments for depreciation and capacity utilization. The TPO also rejected the alternative benchmarking using business projections. The assessee argued that the TPO incorrectly computed margins by treating non-operating expenditures as operating in nature and failed to allow adjustments for depreciation and capacity utilization. The Tribunal restored the issue to the Assessing Officer (AO) to consider the assessee's claim of depreciation adjustment after verifying the rates and directed the TPO to correctly compute the margins of the assessee and comparables, addressing the mistakes apparent on the face of the record.2. Addition made on account of adjustment to the arm's length price of management service charges:The assessee paid Rs. 40,50,275 to its Associated Enterprises (AE) for management services, which the TPO determined at nil, citing duplication of payments and lack of evidence of services rendered and benefits derived. The Dispute Resolution Panel (DRP) sustained the adjustment. The assessee argued that the TPO did not follow any prescribed methods to determine the arm's length price and failed to consider additional evidence submitted. The Tribunal restored the issue to the AO/TPO to examine the benchmarking and documentary evidence provided by the assessee and determine the arm's length price by applying any of the prescribed methods, ensuring a fair opportunity for the assessee to be heard.3. Non-allowance of set-off of brought forward business loss:The AO, in the draft assessment order, allowed set-off of brought forward business loss of Rs. 15,61,451 and unabsorbed depreciation. However, in the final assessment order, the AO omitted the set-off of brought forward business loss without valid reason. The Tribunal directed the AO to allow the set-off of brought forward business loss and then set-off the unabsorbed depreciation of prior years.Conclusion:The Tribunal partially allowed the appeal, restoring the issues related to the arm's length price adjustments for imported capital assets and management service charges to the AO/TPO for re-examination and directing the AO to allow the set-off of brought forward business loss. The judgment emphasizes the need for proper benchmarking and verification of claims, ensuring adherence to prescribed methods and fair opportunity for the assessee to present their case.