2022 (9) TMI 511 - HC - Income Tax

TP adjustment on account of payment of Management Fees to Associated Enterprise (AE) - assessee had failed to establish rendering of actual services commensurate with the payment made and also tangible beneft derived by the assessee from receipt of such services? - ITAT held that services were rendered by the AE and were also benefiting the assessee - HELD THAT - A reading of the clauses of the agreement make it quite clear that the management services could be rendered by all or any of the Sandvik Companies such operations would be on behalf of Sandvik AB. In our opinion the Tribunal committed no error in deciding the issue in favour of the Respondent more so when the management service fees received by Sandvik AB had been taxed by the A.O. in charge of assessment of Sandvik AB Sweden, as provider of such services. Addition on account of closing stock of obsolete inventory - CIT(A) deleted the addition, which was upheld by the Tribunal by following its Order passed in the case of the Respondent, in the Revenue Appeal for the Assessment Year 2004-05 2015 (12) TMI 1742 - ITAT PUNE We cannot persuade ourselves to take a different view on an issue arising between the same parties, which has already been raised and rejected by this Court, although for a different assessment year, more so when there is no change in the factual or legal matrix of the case. Losses sustained by hundred per cent EOU set off against the other business income of the assessee - This issue, however, is no longer res integra. In Hindustan Lever Ltd. 2010 (4) TMI 206 - BOMBAY HIGH COURT as held that AO was plainly in error in proceeding on the basis that because the income is exempted, the loss was not allowable. All the four units of the assessee were eligible under Section 10B. Three units had returned a profit during the course of the assessment year, while the Crab Stick unit had returned a loss. The assessee was entitled to a deduction in respect of the profits of the three eligible units while the loss sustained by the fourth unit could be set off against the normal business income. Thus no substantial questions of law arise in the present appeal, which is, accordingly, dismissed.

Summary

Issues:
1. Adjustment of management fees paid to Associated Enterprise (AE)
2. Addition of provision for obsolete inventory to closing stock
3. Set-off of losses from Export Oriented Unit (EOU) against other business income

Analysis:

Adjustment of Management Fees:
The appeal under Section 260 A of the Income Tax Act, 1961 concerns the adjustment of management fees paid to an Associated Enterprise (AE). The Income Tax Appellate Tribunal (ITAT) had held that no adjustment was warranted without establishing tangible benefits from the services rendered. The Tribunal found that the management services were indeed provided to the assessee, leading to the deletion of the adjustment made by the Transfer Pricing Officer (TPO). The Tribunal upheld the view that the services were rendered by group entities of the AE in accordance with the agreement, thus justifying the deletion of the adjustment.

Addition of Provision for Obsolete Inventory:
Regarding the addition of Rs.19,52,000 to closing stock for obsolete inventory, the Assessing Officer disallowed the provision made by the assessee. However, the CIT(A) and the Tribunal both ruled in favor of the assessee, citing consistency in the method of accounting for obsolete inventory. The Tribunal referred to a previous order for the assessment year 2004-05 where a similar provision was upheld, emphasizing the principle of consistency and the absence of evidence to disbelieve the method followed by the assessee.

Set-off of Losses from EOU:
The issue of setting off losses from a newly set up Export Oriented Unit (EOU) against other business income was also addressed. The High Court referred to previous judgments, including Hindustan Lever Ltd. v. Dy. CIT, to establish that losses from the EOU could be set off against other business income. The Court emphasized that Section 10B provides for a deduction, not an exemption, allowing for the set-off of losses sustained by the EOU against normal business income. The Court dismissed the appeal, stating that no substantial questions of law arose in the present case.

In conclusion, the High Court upheld the decisions of the CIT(A) and the Tribunal regarding the adjustment of management fees and the addition of provision for obsolete inventory. Additionally, the Court affirmed the principle of setting off losses from the EOU against other business income, citing relevant legal provisions and precedents.