TaxTMI 
TaxTMI 
2011 (8) TMI 427
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....nt material facts are like this. In the course of the assessment proceedings, the Assessing Officer noticed that the assessee has written off obsolete inventory amounting to Rs. 25,47,394, and claimed deduction, in computation of business income, in respect of this write off. In response to Assessing Officer's requisition for the nature and details of this write off, it was submitted by the assessee that, in accordance with the accounting policy regularly followed by the assessee, the assessee regularly identifies and writes off obsolete inventory. The items so identified include the inventory items which are lying in stock for more than two years, inventory items which have no probable or forecasted use and obsolescence arising out of technological changes. The list of items to be so written off, according to the assessee, are prepared for each division as on a date and finally approved by the Divisional Chief Financial Officer. It was also submitted by the assessee that these obsolete inventory items are kept separately for disposal, and, after necessary internal approvals, destroyed or sold as scrap material. It was also submitted that the sale proceeds as scrap material is acco....
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....te stocks have been used from year to year, and revenue authorities do not even question bona fides of these parameters. Even in the present year, the objectivity or bona fides of this mechanism have not been called into question by the revenue authorities. As we find from the admitted facts on record, the issue really before us is whether the assessee was justified in not including the value of the slow moving inventory, so written off, in the closing stock. It is only elementary that closing stock is to be valued at the cost price or market price - whichever is less. However, in the present case and particularly bearing in mind the fact that in the present case the inventory items so excluded from closing stock are the items which have not been moving in stock for over two years, which have no likely use and which have been approved, through a sound internal control mechanism, for being discarded, by way of destruction or sale as scrap, we see justification in adopting market value of these items as nil. In effect, even as it is termed as write off of obsolete stock, it is adopting nil value in respect of market value of the items of obsolete stock. We have also noted that this i....
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....questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasoning." 6. In the light of the above observations, we donot think that observations made by Hon'ble Bombay High Court in the case of Heredilla Chemicals Ltd. (supra), which were dealing with a situation in which the year in which the machine had become obsolete could not be identified on the basis of any objective criterion and in which assessee had no justification for write off of the obsolete machine in that particular year, would apply to the fact situation that we are now in seisin of . In a later judgment, Hon'ble Bombay High Court, in the case of Alfa Laval India Ltd. v. Dy. CIT [2004] 186 CTR 390/[2003] 133 Taxman 740 [which has been approved by Hon'ble Supreme Court in the judgment CIT v. Alfa Laval India Ltd. [2007] 295 ITR 451/[2008] 170 Taxman 615], upheld the assessee's claim of write off of 90 per cent of sl....
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.... No. 1 is thus allowed. 8. Ground No. 2 is basically an alternative ground of the assessee, which would have been relevant only in the event of first ground of appeal having been dismissed. However, as ground No. 1 is allowed, this grievance of the assessee is rendered academic and infructuous. We, therefore, see no need to deal with this grievance. 9. Ground No. 2 is thus dismissed as infructuous. 10. In ground No. 3, the assessee has raised a grievance against the arm's length price adjustment of Rs 6,25,82,5634 made to the income of the assessee. There are several sub-grounds to this ground of appeal, but since all these sub-grounds of appeal are primarily arguments in support of the main grievance against the ALP adjustment, we take all these grounds of appeal together. 11. Learned counsel has raised an objection, which he terms as preliminary objection, calling into question validity of reference made by the Assessing Officer to the Transfer Pricing Officer. It is his contention that, in view of Hon'ble Delhi High Court's judgment in the case of Sony India (P.) Ltd. v. CBDT [2007] 288 ITR 52/[2006] 157 Taxman 125 read with the provisions of law as they stood at the....
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....Sony India (P.) Ltd. (supra) with a view to highlight that what prevailed upon Their Lordships in upholding the CBDT instructions directing all international transactions beyond a particular threshold monetary limit was that, at the stage of making a reference to the Transfer Pricing Officer, a prima facie view of the Assessing Officer is sufficient, since he will anyway another opportunity when he can form a considered view as to whether to accept the order passed by the Transfer Pricing Officer, or not. Learned counsel submits that, in view of the amendment in law and having regard to the fact that the order passed by the Transfer Pricing Officer binds the Assessing Officer, it is now incumbent upon the Assessing Officer to form a considered opinion on whether to make the reference to the Transfer Pricing Officer under section 92CA(1), or to determine ALP on his own under section 92C(3), and since the Assessing Officer has not conducted this exercise, the very reference made by the Assessing Officer is legally invalid. Learned Departmental Representative, on the other hand, strongly opposes these submissions. He submits that the assessee has not challenged the validity of referen....
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....assessee are purely constitutional issues, which question correctness of legal provisions of the statute, and these issues cannot be raised before this Tribunal - which itself is a creature of the statute. Learned Departmental Representative thus urges us to reject this grievance of the assessee. In rejoinder, learned counsel reiterates his submissions and points out that there is indeed a specific ground of appeal covering this grievance, as, in ground of appeal No. 3.9, the assessee has stated that "on the facts and in the circumstances of the case, the TPO and the Assessing Officer has erred in proposing, and the Hon'ble DRP has further erred in upholding/confirming the action of the TPO in not stating any reasons to show that either of the conditions mentioned in clauses (a) to (d) of section 92C(3) of the Act were satisfied before making an adjustment of income to the appellant". It is further submitted that the Assessing Officer's decision to outsource determination of ALP, as reference under section 92CA(1) essentially implies, affects legitimate interests of the assessee, and there cannot be any justification in depriving the assessee of a hearing before such a decision is ....
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....ee locations, and sales and service offices located all over India. In the course of the business so carried out, the assessee has entered into following international transactions: Sr No. Nature of transaction Amount ALP determination method used by the assessee 1. Import of raw material and other supplies 110,04,38,208 Transactional Net Margin Method i.e. TNMM 2. Export of Finished Goods 1,25,73,836 TNMM 3. Import of Testing Equipment 1,68,21,496 TNMM 4. Payment of royalty 10,23,098 TNMM 5. Provision for support services 1,36,23,536 TNMM 6. Availing of services 9,60,716 TNMM 7. Receipt of commission income 55,95,166 TNMM 8. Reimbursement of expenses 1,01,62,651 TNMM Total 116,11,98,707 13. In the transfer pricing study submitted by the assessee, the assessee had identified 12 comparables, namely Ador Powerton Limited, Aimil, Avtech Limited, Chemtrols Engineering Limited, Continental Controls Limited, Ethos Havac Systems Limited, Hind Rectifiers, Megatech Control Limited, RSB Transmission India Limited, Remi Equipment, Remi Motors Limited and VXL....
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....the assessee. As regards Ashco Industries Limited, the stand of the assessee was that this company is functionally different inasmuch as it is engaged in the business of food testing laboratories and residual analysis of pesticides industries which is materially different from assessee's business. It was also pointed out by the assessee that, as evident from annual report of Ashco, this company was engaged in a number of transactions with its AEs, and, for this reason also, its profits can be treated as a benchmark for the assessee. It was further submitted by the assessee that the company has recently changed its policy with regard to bad debts, as a result of which an exceptional provision of Rs. 2,36,90,877 had to be created. It was also noted that there is a major provision for differential charges in respect of certain duty claimed on retrospective basis. The TPO agreed to exclude the items, but further noted that margin of comparables shall also be accordingly adjusted. The assessee further asked for an adjustment in respect of working capital, which TPO agreed to grant , and was granted at 0.66 per cent. The TPO also noted that the assessee has a commission income of Rs. 56,....
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....1.55 per cent. It appears that the TPO has excluded the inventory from computation of working capital adjustment, but there cannot be any justification for doing so. Once he agrees in principle to make an adjustment for efficiency in working capital, as he has done in this case, there cannot be any good reasons to exclude inventory from the computation for working capital adjustment. In this view of the matter, we uphold the grievance of the assessee that the working capital adjustment should have been taken at 1.55 per cent, as was claimed by the assessee and which has not been specifically rejected by the TPO, as against 0.66 per cent made by the TPO. 16. Secondly, we have noted that two companies, namely Aplab and Ashco, have been taken as comparables- despites assessee's vehement objection to the inclusion of these companies as comparables. As far as Ashco is concerned, we find that, as evident from their directors report - a copy of which is placed at pages 280-281 of the paperbook, this company is engaged in the business of "providing all types of testing facilities for the food industry" and that it specializes in "residual analysis of pesticides antibiotics, PCBs, PHA, S....
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.... on record to show that these two companies were also engaged in the same business, there cannot indeed be any justification for including the same as a comparable for the present year. The information about precise business activities are not in public domain and, as held in the case of Skoda Auto India (P.) Ltd. v. Asstt. CIT [2009] 122 TTJ 699/30 SOT 319 (Pune), the assessee cannot be expected to get the details which are not in public domain. When TPO is insisting for inclusion of this comparable, the onus is on him to demonstrate that the comparable entity is engaged in the same or materially similar activity. We, therefore, also uphold assessee's grievance against inclusion of Aplab Limited as a comparable. In effect, thus, we hold that Aplab Limited and Ashco Industries Limited cannot be included in the list of comparables for the purposes of benchmarking - first, because, two new companies have merged into this company and there is nothing on record to show that these companies were engaged in the same or materially similar activity; and, second, because, the business activity of this company is significantly different from the business activity of the assessee. 17. Thir....
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....r Pricing Officer. In page 4 of the power point presentation filed before us, the assessee has filed a chart of showing, what the assessee claims to be, correct figures. It is submitted that the assessee had given the computation of these margins before the TPO as well, but, without assigning any reasons, the TPO has rejected the same. We, therefore, deem it fit and proper to remit this issue to the file of the Assessing Officer for dealing with the computation of correct margins, after giving assessee an opportunity of hearing on this issue, and by way of a speaking order. 21. To sum up, so far as merits of the transfer adjustments are concerned, we remit the matter to the file of the Assessing Officer for adjudication de novo in the light of our above observations and specific directions. While doing so, the Assessing Officer will give a due and fair opportunity of hearing to the assessee and deal with the contentions of the assessee by way of a speaking order. 22. In the course of hearing before us, it was submitted by learned counsel that even though he has begun by taking a technical objection to the Assessing Officer's reference to the Transfer Pricing Officer, in the e....
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.... and it is a settled legal position that tax deduction at source requirements do not come into play in the case of reimbursement of expenses. Undoubtedly these payments are made for the services rendered but the TDS requirements would come into play at the point of time when services are made to the person who is rendering the services or to the person with whom contract for rendering of these services is entered into. Right now we are dealing with a situation in which payment is made to a group concern under a cost sharing arrangement and the payment is thus not for services but as reimbursement of expenses. In our considered view, TDS requirements do not come into play at this stage. Accordingly, the impugned disallowance must be deleted. We direct the Assessing Officer to do so. 27. Ground No. 4 is thus allowed. 28. In ground No. 5, the assessee is aggrieved of disallowance of Rs. 58,35,000, out of payment made to Emerson Export Engineering Centre a division of Emersons Electric Co. India (P.) Ltd., under section 40A(2)(b) of the Income-tax Act. 29. So far as this grievance of the assessee is concerned, the material facts are like this. During the course of the assessme....