2023 (3) TMI 704 - AT - Income Tax

Tribunal directs reassessment in partial appeals, upholds CUP method, remands non-TP issues for re-evaluation

The Tribunal partially allowed the appeals, directing the AO/TPO to reassess various issues based on its guidance and principles of natural justice. The ... Transactional Net Margin Method (TNMM) as most appropriate method - Comparable Uncontrolled Price (CUP) method - Transfer pricing benchmarking - Remand to Assessing Officer for fresh transfer pricing computation - Admission of additional evidence under Rule 29 - Depreciation on goodwill - valuation in year of acquisition and consequential allowance - Disallowance of business expenditure for want of supporting evidence - Dispute Resolution Panel (DRP) directions and scope under Chapter X - Foreign exchange loss - applicability of Section 43A and judicial precedents (Woodward, Wipro) - Provision for site restoration fund - requirement of factual/scientific basisTransactional Net Margin Method (TNMM) as most appropriate method - Comparable Uncontrolled Price (CUP) method - Transfer pricing benchmarking - Remand to Assessing Officer for fresh transfer pricing computation - Applicability of TNMM as the most appropriate method for benchmarking the assessee's international transactions and direction to rework ALP accordingly. - HELD THAT: - The Tribunal, applying its earlier decision in the assessee's own proceedings and noting no material change in facts, held that TNMM is the most appropriate method instead of the CUP method for A.Y. 2011-12. The Tribunal found the TPO's CUP analyses to be flawed (incorrect internal/external comparables, faulty methodology and failure to appreciate nature of payments) and that the TPO had not applied TNMM though it was incumbent on him to consider the method indicated by facts and documentation. The Tribunal therefore set aside the TPO/DRP conclusions on TP issues for A.Y. 2011-12 and directed the AO/TPO to apply TNMM and compute ALP afresh; the same direction was applied to like international transactions for A.Ys. 2012-13, 2013-14 and 2014-15 by following the lead decision for consistency. [Paras 17, 19]TP grounds allowed: TNMM to be adopted as the most appropriate method and issues remitted to AO/TPO for recomputation of ALP for the relevant assessment years.Disallowance of business expenditure for want of supporting evidence - Admission of additional evidence under Rule 29 - Claim for deduction of cash discounts rejected for want of evidence and application for admission of late additional documents under Rule 29 refused. - HELD THAT: - The DRP had upheld the AO's disallowance because the assessee failed to produce supporting vouchers or documentary proof during assessment/DRP proceedings. The assessee subsequently sought to admit documentary evidence before the Tribunal under Rule 29, years after the assessment and after having had multiple opportunities before lower authorities. Applying precedent and Rule 29 principles, the Tribunal exercised its discretion to refuse belated admission where the assessee was negligent in not producing evidence earlier and thereby dismissed the Rule 29 application and sustained the disallowance. [Paras 21, 23]Application for additional evidence rejected; cash discount disallowance upheld.Depreciation on goodwill - valuation in year of acquisition and consequential allowance - Remand to Assessing Officer for fresh transfer pricing computation - Claim for depreciation on goodwill remitted to the Assessing Officer for fresh consideration after valuation in the year of acquisition (A.Y. 2007-08) attains finality. - HELD THAT: - The Tribunal noted that the goodwill arose on amalgamation and that its correct valuation must be determined in the year of acquisition (A.Y. 2007-08). As the valuation/quantification for that year had not attained finality before the Tribunal, the Tribunal remanded the matter to the AO to consider evidence for the acquisition year and, if a definite valuation is arrived at, to allow depreciation for the subsequent years in accordance with law. The Tribunal also observed that statutory amendments (Finance Act, 2021) operate prospectively and do not affect these assessment years. [Paras 38]Grounds on depreciation on goodwill are remanded to the AO for fresh adjudication after valuation for A.Y. 2007-08 is determined; allowed for statistical purposes.Dispute Resolution Panel (DRP) directions and scope under Chapter X - Admission of additional evidence under Rule 29 - Additional grounds raised before the DRP (grounds 11-15 etc.) require adjudication and are remitted to the Assessing Officer for fresh consideration. - HELD THAT: - The Tribunal held that once additional grounds are raised before the DRP they are required to be adjudicated; where the DRP did not decide certain additional grounds, those grounds must be remitted to the AO for consideration in accordance with the Chapter X process (draft assessment, DRP proceedings, final order). The Tribunal directed the AO to examine the issues afresh and follow due process. [Paras 49]Additional grounds remanded to AO for fresh adjudication; grounds partly allowed for statistical purposes.Foreign exchange loss - applicability of Section 43A and judicial precedents (Woodward, Wipro) - Claim for forex loss on ECB/foreign currency liabilities remanded to the Assessing Officer for fresh examination with reference to Section 43A and relevant Supreme Court precedents. - HELD THAT: - The Tribunal observed that earlier authorities had denied the claim principally because it was not made in the return or revised return. Relying on the Supreme Court's reasoning in Wipro and on Woodward Governor, the Tribunal held appellate authorities may adjudicate such claims and directed remand to the AO to examine the matter afresh (including applicability of Section 43A), permitting the assessee to furnish necessary information and evidence for determination in accordance with law. [Paras 68]Issue remitted to AO for fresh consideration in light of Section 43A and Supreme Court authorities; allowed for statistical purposes.Provision for site restoration fund - requirement of factual/scientific basis - Provision for site restoration fund remanded to the Assessing Officer for verification on production of scientific/factual basis and supporting evidence. - HELD THAT: - DRP had rejected the provision as the assessee's accounts lacked a scientific basis and there was no evidence of actual reclamation/rehabilitation expenditures; the Tribunal directed remand so AO can verify documented evidence, and directed the assessee to produce the necessary scientific/supporting material to substantiate the provision before AO. [Paras 81]Provision remitted to AO for fresh adjudication subject to production of supporting scientific/factual evidence; allowed for statistical purposes.Transfer pricing - deputation/secondment of employees and reimbursement - Adjustment in respect of reimbursement of salary/stay/travel for employees seconded to AE confirmed by the DRP and upheld by the Tribunal. - HELD THAT: - On facts the TPO applied a mark-up to the salary reimbursement treating the deputation as a service with an arm's-length mark up. The DRP examined previous contrary findings but found that deputation of technical experts can confer benefit to the AE and thereby justify a mark-up; the Tribunal, on review of record, found no reason to interfere and dismissed the assessee's ground. [Paras 61]Adjustment confirmed; ground dismissed.Non-pressing grounds - Several grounds expressly not pressed by the assessee are dismissed as not pressed. - HELD THAT: - The assessee withdrew or did not press a number of grounds (specified in the order) and the Tribunal recorded those grounds as dismissed as not pressed, without substantive adjudication.Those grounds dismissed as not pressed.Final Conclusion: The Tribunal allowed the transfer pricing grounds by directing the AO/TPO to adopt TNMM as the most appropriate method and to recompute ALP for AYs 2011 12 to 2014 15; it remitted several non TP factual issues (depreciation on goodwill - valuation to be determined for AY 2007 08, forex loss, site restoration provision, and certain additional grounds raised before the DRP) to the Assessing Officer for fresh consideration with directions to follow due process; the Tribunal refused belated additional evidence on cash discounts and upheld the related disallowance, confirmed the deputation/salary reimbursement adjustment, and dismissed unpressed grounds. Issues Involved:1. Transfer Pricing Grounds (TPO Grounds)2. Non-Transfer Pricing Grounds (Non-TPO Grounds)Detailed Analysis:Transfer Pricing Grounds (TPO Grounds):1. Rejection of TNMM Method:The assessee used the Transactional Net Margin Method (TNMM) to benchmark its international transactions, concluding they were at arm's length. The TPO rejected TNMM, opting instead for the Comparable Uncontrolled Price (CUP) method, leading to a proposed adjustment of Rs. 55,20,26,837/-.2. DRP's Endorsement of TPO's Approach:The Dispute Resolution Panel (DRP) upheld the TPO's rejection of TNMM, endorsing CUP as the most appropriate method for benchmarking.3. Tribunal's Previous Rulings:The Tribunal had previously ruled in favor of the assessee for AY 2009-10, rejecting the TPO's CUP method in favor of TNMM. The Tribunal reiterated that TNMM should be used for benchmarking in the current appeal, directing the TPO to apply TNMM and reassess the transactions.4. Application of TNMM for Subsequent Years:The Tribunal extended its ruling to subsequent assessment years (2012-13, 2013-14), directing the TPO to apply TNMM for these years as well.Non-Transfer Pricing Grounds (Non-TPO Grounds):1. Disallowance of Cash Discounts:The AO disallowed Rs. 9,56,82,000/- claimed as cash discounts due to lack of evidence. The Tribunal rejected the assessee's late submission of additional evidence, upholding the disallowance.2. Depreciation on Goodwill:The Tribunal remanded the issue of depreciation on goodwill back to the AO for re-evaluation, directing the AO to consider the valuation of goodwill from AY 2007-08 and apply the correct depreciation rate.3. Disallowance of Provision for Obsolete Stock:The Tribunal remanded the issue back to the AO to verify if the provision for obsolete stock was already offered as income by the assessee, directing the AO to re-examine the evidence.4. Disallowance of Forex Loss:The Tribunal remanded the issue of forex loss back to the AO for fresh examination, directing the AO to consider the Supreme Court's rulings in Woodward Governor and Wipro cases, and section 43A of the Act.5. Reimbursement of Salary Expenses:The TPO added a markup to the salary expenses reimbursed by the assessee to its AE, leading to an adjustment of Rs. 7,81,482/-. The Tribunal upheld the TPO's adjustment, agreeing that the services rendered had a value beyond mere cost reimbursement.6. Disallowance of Provision for Site Restoration Fund:The Tribunal remanded the issue back to the AO, directing the assessee to provide scientific evidence and actual expenditure incurred for site restoration.7. Additional Grounds Raised Before DRP:The Tribunal remanded additional grounds raised by the assessee (e.g., provision for site restoration, obsolescence of spares, community development expenses) back to the AO for re-evaluation, directing the AO to follow due process.Conclusion:The Tribunal allowed the appeals partly for statistical purposes, directing the AO/TPO to reassess various issues based on the Tribunal's guidance and the principles of natural justice. The appeal for ITA No. 2169/Hyd/2018 was dismissed, while the remaining appeals were remanded for further consideration.