TMI Blog2011 (8) TMI 427X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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. Exclusion on commission income from profitability - Held that:- as related costs have not been segregated even on estimation basis which such an allocation essentially involves, we consider it appropriate that commission income on direct sales should not be excluded from the profitability of the assessee. Disallowance u/s 40A(2) - excessive or unreasonable payment - Held that:- A disallowance under section 40A(2)(b) on ad hoc basis, as a percentage of total expenditure incurred, is inherently bad in law because such a disallowance can never have reasonable nexus with the market price of services for which payment is made. - There is nothing on record to even suggest that the service charges are in excess of its fair market value. - Appeal allowed partly and remitted for statistical purposes. - IT APPEAL NO. 8118 (MUM.) OF 2010 - - - Dated:- 12-8-2011 - PRAMOD KUMAR, V. DURGA RAO, JJ. Arvind Sonde and Alok Sarda for the Appellant. J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the value of closing stock. The Assessing Officer also referred to Hon'ble Bombay High Court's judgment in the case of CIT v. Heredilla Chemicals Ltd. [1997] 225 ITR 532/94 Taxman 420 wherein, according to the Assessing Officer, it has been held that the mere write off of an asset is not sufficient to claim the deduction, and the deduction can only be claimed in the year in which the asset is actually sold off. The Assessing Officer finally concluded that "the fact remains that the value of these so called inventories is not included in the closing stock". The objection raised by the assessee before the Dispute Resolution Panel was, relying upon the CIT(A)'s order for the immediately preceding year, was summarily rejected. The assessee is aggrieved of the disallowance so made by the Assessing Officer and is in appeal before us. 4. Having considered the rival contention and having perusal the material on record, we are inclined to uphold the grievance of the assessee. It is only elementary, and as has been recognized by Hon'ble Supreme Court's landmark judgment in the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481, an anticipated loss with regard to the value of stock is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticular justification even for the write off in that particular year. Their Lordships have observed that, "It is the case of the assessee that over the course of years the production process of the chemical was changed whereby the catalyst plant was rendered superfluous and as a result thereof, the PAN catalyst became obsolete" and that "Moreover, the production process of chemical in the factory of the assessee did not undergo the change in the year under consideration. Admittedly as set out in para 8 of the statement of the case, the production process had been changed over the course of the years. In such a situation the assessee cannot claim deduction for the cost of the PAN catalyst in any year he likes." There was thus no good reason as to why the deduction was claimed or write off was made in that particular year. It was in this backdrop that Their Lordships observed that "Merely by writing off the value thereof, the assessee is not entitled to claim deduction in the year in which he had written off the same. There must be something positive to show that its value became nil in the particular year to justify the claim for deduction in that year." One must, however, bear in m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is to be allowed in the year in which asset is actually sold, is not of universal application. It would, in our humble understanding, only apply in a situation in which there is no specific and acceptable explanation for write off for a particular year. In any event, we have to read these judgments in a harmonious manner, and that is what a harmonious reading leads us to. Lets not forget that right now we are dealing with a case in which write off is justified on the basis of application of a uniform criterion which has been applied consistently over the years, is done in an objective manner and the bona fides of the manner of provisioning is not called into question and the same has not been objected to by the revenue authorities. That leaves us with only the objection that scrap value realized in the case of obsolete stock has not been accounted for in the year of write off, or, in other words, write off is claimed on gross basis and not net basis. There is not much merit in this objection either. In many of the cases, as is submitted by the assessee and not disputed by the Assessing Officer, the obsolete inventory is to be destroyed as selling the same even as scrap will adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rice by the Transfer Pricing Officer is devoid of jurisdiction and, as such, non est. Elaborating upon his objection, learned counsel invites our attention to the interplay between section 92C(3) and 92CA(1) of the Income-tax Act. It is submitted that while the Assessing Officer himself can determine the arms length price of an international transaction, as envisaged under section 92C(3), the Assessing Officer can also, when he "considers it expedient or expedient so to do", with the previous approval of his Commissioner, refer to the computation of arms length price of international transaction to the Transfer Pricing Officer. He submits that once he refers the determination of the arms length price the Transfer Pricing Officer, the resultant determination of ALP by the Transfer Pricing Officer is binding on the Assessing Officer since, in view of the provisions of section 92CA(4) as they stand amended with effect from 1-6-2007 by the Finance Act, 2007. He invites our attention to the fact that prior to this amendment in section 92CA(4), the Assessing Officer was to compute total income of the assessee "having regard to" the determination of ALP in the order passed by the Transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ointed out that since the assessee fully participated in the proceedings before the TPO, it is no longer open to him to question the same. It is further submitted that the Assessing Officer can never form a considered view since transfer pricing is a highly specialized and technical subject, and all that the transfer pricing report accompanying the Income-tax return has is some basic data which, by itself, cannot lead to any considered opinions being drawn. Learned Departmental Representative then submits that the scope of section 92C(3) and 92CA(3) is mutually exclusive and quantitatively different, but whichever be the course followed, it does not adversely affect the assessee inasmuch as the assessee gets a full opportunity of hearing before the ALP is determined. Learned Departmental Representative then points out that Hon'ble Delhi High Court's judgment in the case of Sony India (P.) Ltd. (supra) was in a writ jurisdiction, and the observations so made in the judgment must be considered in that light. It was submitted that assessee is at liberty to approach the Hon'ble High Court in writ jurisdiction but it cannot be open to the Tribunal to examine validity of law in not provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and rather unfettered scope of section 92CA(1) does act to assessee's prejudice. It is then submitted that the veiled reference to section 292BB is misplaced because it is not merely a question of wrong section and it affects the assessee in substantial manner. It is then submitted that merely because the assessee has participated in the proceedings, it cannot be said that the assessee has lost his right to question the jurisdiction. Acquiescence, according to the learned counsel, cannot vest the jurisdiction, when statue does not vest it. As for the hearing before the Transfer Pricing Officer and the Dispute Resolution Panel, learned counsel submits that the same is not a compulsory process and qualitatively different from the hearing before the Assessing Officer. He then submits that the rationale of the judgment, and the line of reasoning adopted by Their Lordships, which cannot be questioned by a lower forum, supports the case of the assessee, and that is what learned counsel has attempted to demonstrate in his arguments. Whether law is laid down in a writ proceedings, or appellate proceedings, the law so laid down is binding on the forums lower in judicial hierarchy. We are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 per cent, and the weighted mean for these three years was computed at 5.34 per cent. After making adjustment for the working capital and provision for doubtful debts, the assessee computed adjusted margin at 4.19 per cent as against its own margin at 4.82 per cent. In the course of proceedings before the Transfer Pricing Officer, as a result of reference having been made by the Assessing Officer to him for determination of arms length price, the TPO took objection to multiple year data being taken into account for comparability analysis. The assessee's contention to the effect that reference to past two year's data for the purpose of comparability analysis should be "an automatic, adequate and sufficient compliance of the provision of rule 10B(4)" was rejected by the Transfer Pricing Officer. Referring to the wording of rule 10B(4), he observed that the data for last two years prior to the year in which international transactions have taken place can be taken into account only when "such data reveal facts which could have an influence on the determination of arms length price in relation to the transaction being compared". Since, according to the Transfer Pricing Officer, the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was of the view that commission income, being of an entirely different nature and involves different types of functions and risks, cannot be benchmarked alongwith industrial activity of the assessee. The TPO further noted that the assessee has not identified specific costs incurred in earning this commission income, and thus commission income was excluded on gross basis. Finally, the assessee claim of deduction of 5 per cent, under proviso to section 92C(4), was rejected on the ground that when variation between price at which transaction has been entered into vis- -vis arms length price computed is more than 5 per cent, no such deduction is to be given. It was also contended that amendment in section 92C(4) makes it clear that legislative intention was only to accept the transaction value when it was within 5 per cent deviation from the computed ALP, and not that 5 per cent was to be granted as a standard deduction in computing the arms length price. The assessee is not satisfied and is in appeal before us. 14. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 15. We will de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tomate, control and manage complex plant processes and, in the process, manufacture and deal in includes mass flow meters, liquid and gas analytical instrumentation and systems, temperature transamitters, and level instrumentation. The assessee is, therefore, quite justified in its claim for exclusion of this company. The fact that this company was included as one of the comparable, by assessee himself, in the preceding assessment year cannot be put against the assessee, as whether or not an comparable is to be included must depend on its merits rather than be solely guided by the events of earlier year - particularly when assessee is successfully able to demonstrate that the entity sought to be used as a comparable is not engaged in same or materially similar business at least in the present year. As far as Aplab is concerned, we have noted that, as evident from its notes to accounts for the year ended 31-3-2006 a copy of which was placed before us at pages 276 onwards of the paperbook, two companies, namely Aplab Display Devices and Systems Limited and Swicon Micro Systems (P.) Ltd, merged in Aplab Limited in pursuance of amalgamation scheme duly approved by Hon'ble Bombay High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Es in India giving them visibility and presence, is engaged in rendering warranty services for these direct sales on which commission is earned, and a part of its marketing efforts also contribute to this earning. In these circumstances, and particularly as related costs have not been segregated even on estimation basis which such an allocation essentially involves, we consider it appropriate that commission income on direct sales should not be excluded from the profitability of the assessee. On this aspect also, we must uphold the grievance of the assessee. 18. Fourthly, the question whether benefit of 5 per cent even when the variation in value of international transaction with AEs and its ALP is more than 5 per cent, prior to amendment in second proviso to section 92C with effect from 1st October, 2009, the issue is no longer res integra. In the case of Asstt. CIT v. UE Trade Corporation (India) (P.) Ltd. [2011] 44 SOT 457/9 taxmann.com 75 (Delhi), a coordinate bench has taken the view that this amendment is only prospective, and that so far as pre 1st October, 2009 position is concerned, the adjustment of 5 per cent is to be allowed even in the cases where difference in val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment will then not survive. In the preceding paragraphs, we have upheld these contentions. Therefore, the question regarding validity of reference, whatever be its merits or lack thereof, is purely an academic question on the facts of this case. In view of the submissions of the learned counsel, therefore, we decline to deal with this technical objection. Similarly, very elaborate submissions were made on the question whether the decisions of this Tribunal, as also Hon'ble Courts above, bind the Dispute Resolution Panel or not, and if these precedents are to be taken as of binding nature on the DRP, how can the Assessing Officer protect his interests of pursing the matter in further appeals against such judicial precedents, but, as given the academic nature of these discussions in the present situation, we see no need to deal with this aspect of the matter either. On the question of use of multiple year data also, it is not really necessary, on the facts of this case, to adjudicate the issue on merits. These issues are anyway left open for adjudication in a fit case. 23. Ground No. 3 is thus allowed for statistical purposes in the terms indicated above. 24. In ground No. 4, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile the Assessing Officer had proposed a disallowance of 20 per cent, the DRP allowed the increase in the expenses only to the extent the increase of turnover was in the same ratio. The assessee is aggrieved and is in appeal before us. 30. Having heard the rival contentions and having perused the material on record, we are not inclined to uphold the impugned disallowance. The disallowance under section 40A(2)(b) can be made only to the extent the payment for the services is excessive or unreasonable vis- -vis the market price of such services, but then what is essentially requires is that the market price of these services is established and then amount paid in excess of such market prices is to be disallowed. The Assessing Officer has not even gone through the motions of this exercise. A disallowance under section 40A(2)(b) on ad hoc basis, as a percentage of total expenditure incurred, is inherently bad in law because such a disallowance can never have reasonable nexus with the market price of services for which payment is made. The Assessing Officer, under the guidance of DRP, has gone a step further. He has disallowed the expenditure to the extent this has not increased in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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