TMI Blog2018 (1) TMI 728X X X X Extracts X X X X X X X X Extracts X X X X ..... o provide MIS on quarterly basis, that he estimated the ALP of the said activity at 2% of the total turnover of the assessee, that the DRP reduced it to 0. 5%. In our opinion there is nothing in the DA that leads to the conclusion that the assessee was required to furnish MIS to its AE. Even if , for the sake of argument it is accepted, then the AO/DRP had not followed the valid procedure for making the adjustment. As per the provisions of chapter X of the Act, the departmental authorities are required to follow one of the methods as envisaged by Rule 10 of the Rules. They cannot make ad-hoc disallowance. While making assessment under other sections of the Act ad hoc disallowance can be made e. g. rate of GP or expenses incurred for personal use of the partners etc. But, under section 92 it is not possible. See Kodak India Pvt. Ltd. case [2016 (7) TMI 677 - BOMBAY HIGH COURT] - Decided in favour of the assessee - I. T. A. /588/Mum/2015, I. T. A. /4940/Mum/2015 - - - Dated:- 12-1-2018 - S/Shri Rajendra, Accountant Member and Ram Lal Negi, Judicial Member Revenue by : Shri Jayant Kumar -DR Assessee by : S/Shri Percy Pardiwala/Niraj Sheth ORDER Per Rajendra, AM. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ames and sunglasses(Rs. 13. 53 crores)and Purchase of promo - tional materials (Rs. 47, 80, 515/-), that it had adopted the RPM and CUP method respectively as the most appropriate method to determine the ALP for its IT. s. He observed that it had not reported the following IT. s: SN. Nature of International transaction Value in (Rs. ) i. Advertising spend in terms of Art. 6. 4 of Distribution Agreement (04. 10. 01) ₹ 2, 07, 82, 059/-debited in P L as Advertising sales promotion . ii. Market information report in terms of Art 11 of the above agreement Not quantified iii. Claim of damaged goods Claimed in Profit Loss account ₹ 6, 48, 60, 993/- as amount of Write down on carrying value of traded goods. During the TP proceedings, he observed that the assessee had claimed ₹ 6. 48 crores under the head write down of traded goods. He required the assessee to file explanation in that regard. It was stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of traded goods was not recoverable from the AE, that similar writing down had been undertaken in the preceding year, that such writing down clearly proved that purchase price of imported goods were overstated. Finally it held that TPO had rightly treated the write-down in the value of traded goods as an IT, that ALP of an IT had to be necessarily determined. It further observed that the contention of the assessee that the write-down of the trading goods was an extra ordinary event, was totally devoid of merit, that write-down could not be ignored for calculating Gross Profit margin that there was no separate debit note. With regard to the assessee's alternative argument that write-down should be considered to reduce the profit margin of the earlier years right from FY. 2004 up to FY. 2009, the DRP held that the argument was totally without any merit, that the events happened in the previous year had to be considered, that accounts could not be re-casted according to convenience of the AO/assessee, that the assessee, in its audited balance sheet, had written down the carrying cost of traded goods during the year under appeal, that there was no basis to notionally appor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royed CUP could not be appelied. (Pg. 27 29 paras 64, 67-68 of ITA 7349 of M 2012). He relied upon the cases of M/s. Johnson Johnson (IT Appeal No. 1291 of 2014, AY. 2006-07, dtd. 03. 04. 2017 of Hon ble Bombay HC), Federal Mogul Automative Products (India)Pvt. Ltd. (ITA/848 of 2015, AY. 2003-04 dtd. 06. 11. 2015 of Hon ble Delhi HC), M/s. Tuppeware India Pvt. Ltd. (ITA/2140/Del/2011 other appeals, AY. 2003-04 dtd. 29. 08. 2014), Transwitch India Pvt. Ltd. (ITA/6083/Del/2010, AY. 2006-07, dtd. 30. 03. 2012) and Accounting Standard (AS)-5. The Departmental Representative (DR) argued that transaction in question was an IT, that no details of damaged stock was provided, that it was not an extraordinary item which had to be excluded, that the TPO had rightly applied RPM for determining the ALP of the transaction, that provisons of section 92(2)(b) were applicable. He relied upon the case of Thomas Cook (India)Ltd. (70 taxmann. com 322) 4. We find that the assessee had written off goods worth ₹ 6. 28 crores during the year under appeal, that it had not shown the transaction as an IT, that the TPO and the DRP were of the view that stock written off was an IT and that ALP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... So called guarantee period was also over for the goods that were received, by the assessee, before two years. Thus, there was no relation between the writing off of obsolete stock and the purchases made by the assessee during the year under appeal. The Indian entity had taken a decision considering the local ground realities and none of the ingredients, that make a transaction an IT. , was existing in the writing off carried out by the assessee. Each and every business transaction cannot be held an IT. 4. 1. Obsolence of items like sunglasses or readymade garments or footwares or for that matter any product related to fashion is a well known fact of commercial and business world. Shelf-life of such items is not very long and with the passage of time they become out of fashion items. It is also a known fact in the business of sunglasses the salesmen use eyewares for demonstration purpose and that such an item would also become unsalable. To clear such inventories businessmen have to find some way. We find that in the case under consideration, the assessee decided to write off and destroy the obsolete stock-in-trade. In its meeting the Board of Directors of the assessee-company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of KOEL, the provision for stock obsolescence was only 1. 03% of its sales whereas it was 8. 98% as far as the Assessee was concerned. The CIT (A) also noted that the mean of the revised margin of the comparable companies after considering the provision for non-moving inventory as non-operating expenses was 8. 17% as compared to 10. 85% in the case of the Assessee. The CIT(A) accepted the plea of the Assessee that since the provision for stock obsolescence was 'abnormal' and extraordinary in nature, it was required to be excluded for the cost of the Assessee in computing its operating margin. Since the said item occurred only in KOEL. the CIT (A) was of the opinion that its margin needed to be re-worked. The rationale for this was that the same treatment had to be accorded to the tested party i. e. the Assessee and its comparables. Since the Assessee's ALP was above the margin of the comparables, the proviso to Section 92 C (2) of the Act was held not to apply. 5 Having heard the learned counsel for the Revenue, the Court is unable to discern any legal infirmity in the approach of the CIT (A) which was upheld by the ITAT in the impugned order. It is sought to be s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fact situation or a material change in law whether enacted or declared by the Supreme Court. In the absence of a change in the facts or any additional input there was no compelling reason for taking a different view. We do not find any reason, in the order of the AO/TPO, for not allowing write off of obsolete stock for this year. In other words, they have made addition without mentioning the new facts that had come to their notice while completing the assessment of the year under appeal and which were different form earlier AY. s. 4. 3. Indian Parliament had introduced the TP provisions in the statute to curb the malpractices of those assessees who would shift profit outside India and would pay no or less taxes in India by showing lesser market value of goods sold/purchased or services offered/availed to/from their AE. s. The basic intention behind the provisions of Chapter X is to ensure that assessees should purchase or sell their goods/services at the rates they would pay or charge from the independent third parties. Fair market value should prevail in the transactions that are entered in to by the AE. s. Income tax Rules, 1962 (Rules) stipulate the methodology for co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of providing it to its AE, that the TPO/DRP had determined the ALP on an ad hoc basis i. e. without following one of the prescribed method, that applying rate of half a percent of the turnover of the assessee was not in accordance with the provisions of law. He referred to the cases of Kodak India Pvt. Ltd. (ITA/7349/Mum/2012), Nimbus Communications (38SOT246); Ness Technologies (India) Pvt. Ltd. (ITA/696 and 1006/Mum/2016) and Kodak India Pvt. Ltd. (ITXA No. 15 of 2014-Hon ble Bombay High Court, dated 11. 07. 2016) and stated that it was mandatory for the TPO to compute ALP by applying one of the prescribed methods. The DR supported the order of the DRP and stated that the DRP had given a substantial relief to the assessee. 5. 3. We have heard the rival submissions and perused the material before us. We find that the TPO had held that the assessee was providing information to its AE, that it was not being compensated for such services, that he referred to the clause 11 of the DA in his support to hold that it was duty bound to provide MIS on quarterly basis, that he estimated the ALP of the said activity at 2% of the total turnover of the assessee, that the DRP reduced it to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd. was between two domestic non Associated Enterprises, yet it would still be considered to be an International Transaction and Chapter X of', the Act would be applicable. This on the basis that the Holding companies of both the respondent assessee as well as M/s. Carestream Health India Pvt. Ltd. had entered into a global agreement for sale of its business. This global agreement was prior in point of time to the sale of imaging business by the respondent assessee to M/s. Carestream Health India Pvt. Ltd. The Assessing Officer passed a draft Assessment Order under Section 144C of the Act on the basis of the order of the TPO. 5. Being aggrieved, the respondent assessee approached the Dispute Resolution Panel (DRP). However, the view of the TPO was upheld by the DRP. 6. On appeal, the Tribunal on interpretation of Section ;92B (2) of the Act, as in force during the subject assessment year concluded that the transaction would not be covered by the definition of International Transaction. This inter alia on the ground that the prior to amendment to Section 92B(2) of the Act w. e. f. 1st April, 2015 such a transaction was not deemed to be an International Transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue to determine the ALP was alien to the methods prescribed under Section 92C of the Act. In the above circumstances, the Tribunal declined to restore the, issue to the Assessing Officer for re-determining the ALP by adopting one of the methods as listed out in Section 92C of the Act. This finding of the Tribunal has also not been challenged by the Revenue . 11. In view of the fact that the Revenue has accepted the order of the Tribunal on its finding on facts on the two issues as pointed out hereinabove as well as the refusal of the Tribunal to restore the issue of determination of ALP to the TPO by following one of the methods prescribed under Section 92C of the Act. Thus, the questions as formulated for our consideration even if answered in favour of the Revenue would become academic in the present facts. Thus, we see no reason to entertain this appeal. However, we make it clear that the issues of law which has been raised in the present appeal are left open for consideration in an appropriate case. Respectfully, following the above judgment of the Hon ble Bombay High Court, we decide ground no. 3 in favour of the assessee, as the DRP has approved the ad ho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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