DCIT, NEW DELHI vs. M/S. R.S. COMPONENTS & CONTROLS INDIA LTD., NEW DELHI

First we will deal with the assessee’s appeal in for the assessment year 2004-05. Following grounds have been raised in this appeal:

The appellant craves leave to add, alter or amend the ground of appeal

Facts of the case in brief are that the assessee filed the return of income on 30.10.2004 declaring loss of Rs.36,28,537/- which was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act) on 30.03.2005. Subsequently, the case was selected for scrutiny. During the course of assessment proceedings, the AO noticed that the assessee had entered into international transactions with Associated Enterprises (AEs) as per following details:

Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted that the assessee was dealing in more than 30,000 products manufactured by different companies and was engaged in the business of supply of industrial components, spare parts in the nature of cables & connectors, control and automation components, electronic and electrical consumables, semiconductors, tests & measurement instruments, maintenance safety security equipment & components, mechanical products & tools and technical books. The assessee submitted to the ld. CIT(A) as under: “CUP is selected as the most appropriate method and the reason for selection of CUP is that (a) The rates are compared on the basis of international price list of Associated Enterprise which are more than the rate charged by them to the assessee. In view of very large number of items the quantification of Arm’s Length Price for each and every product is not verified. In view of above the book value of international transaction with 6 5533 & 3199/Del/2010 RS Components & Controls Ltd. Associated Enterprise are less than the comparable price and the total price paid is the good representation of Arm’s Length Price. (b) The transfer rates have been compared with the international prices of R.S. Components Limited, UK. The International prices are the prices at which the products are available to the independent third parties. The analysis done shows that the international prices of the associated enterprise are more than the rate charged by it to the assessee. (c) The rates have also been compared with the international rates coming on the website of R.S. Components Limited, U.K as on 26.10.2004. Copy of international rates downloaded has also been filed. The difference in the price downloaded from the website and those picked up form paper catalogue is due to updation of website on regular basis where as catalogues are issued once in every 6 months by the associated enterprise. The exercise again proves that the transfer prices are less than the international prices of associated enterprise. (d) The associated enterprise also supplies the product directly of Indian customers at its international prices. The invoices raised on the Indian customers by R.S. Components Limited, UK have been filed. These prices can be compared with the international prices in the box file. The transfer prices are 7 5533 & 3199/Del/2010 RS Components & Controls Ltd. as appearing in the box file. The international prices as appearing in the box file can again be checked with the set of 7 paper catalogue book. (e) Farnell Electronic Components Ltd., UK is a competitor of the company which supplied same type of electronic products in India through its distributors like Hynetic, India and Microdevices, India etc. Brief information and evidence about type of products offered by Farnell and appointment of Microdevices, India as its distributor has been filed. The comparison of current international prices of R.S. Components Ltd., UK with current international prices of Farnell Electronic Components Ltd., UK has been filed.”

The assessee further stated before the ld. CIT(A) that since the catalogue prices were not more than the prices actually charged by the parent company, therefore, the transaction was at Arm’s Length. It was further submitted that the TPO selected 7 comparables companies for comparison purposes, however, those companies were not dealing with similar items and moreover were manufacturing companies. The assessee highlighted the difference on account of the comparables selected by the TPO as per following details:

It was also stated that CUP method was the comparables method and the TNMM method followed by the TPO was flawed because he had compared the percentage with companies which had no similarity in the product range, in the business model and the commercial operations. It was also stated that the assessee company had achieved higher net profit rate in the subsequent year because of increased turnover which resulted in higher absorption of the overhead. Therefore, the lower net profit margin was because of lower turnover and extra ordinary charges to profit and loss account.

The ld. CIT(A) after considering the submissions of the assessee observed that the TPO was right in holding that the CUP method was not most appropriate method in the assessee’s case to determine the Arm’s Length Price in respect of the transactions entered into between the assessee and it’s AE, he mentioned that what the assessee did was that it had compared the prices listed in AE’s catalogue at which AE allegedly sold the goods to the third parties, with the prices paid by the assessee for goods purchased from its AE and this type of comparison cannot be termed as using 10 5533 & 3199/Del/2010 RS Components & Controls Ltd. internal CUP, as envisaged by Indian Transfer Pricing Regulation or even by OECD guidelines. According to the ld. CIT(A) the TNMM was the most appropriate method. He also observed that even if the comparables chosen by the TPO were not correct, the assessee failed to bring the probable comparables. The ld. CIT(A) conducted a fresh search by revisiting databases namely “Prowess” and 7 new comparables were selected. The ld. CIT(A) worked out adjustment of Rs.98,25,957/- by selecting the following 7 new comparables wherein average net operating margin of comparables was 8% as per the following details:

Accordingly, the ld. CIT(A) sustained the addition of Rs.98,25,957/- on account of difference in the Arm’s Length Price as under:

Now the assessee is in appeal. The ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the ld. CIT(A) did not allow any opportunity to the assessee while selecting the 7 new comparables. It was further submitted that the assessee followed the CUP method which was most appropriate method but no cogent reason was given while rejecting the said method and adopting TNMM. It was stated that the comparables selected by the assessee were rejected by the TPO who selected his own 7 comparables which were not at all applicable to the facts of the assessee’s case and that the ld. CIT(A) also adopted another 7 comparables without confronting the same to the assessee, so there was the violation of the principles of natural justice. He requested to set aside the issue back to the file of the TPO/AO.

We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is noticed that the assessee followed CUP method and selected 7 comparables in respect of international transaction to work out the Arm’s Length Price. However, the TPO adopted TNMM instead of CUP method and rejected the comparables adopted by the assessee. He selected 7 new comparables and worked out the Arm’s Length Price adjustment. The ld. CIT(A) although accepted that the comparables chosen by the TPO were not to be considered, however, he adopted 7 new comparables but had not given any reason while rejecting the comparables selected by the assessee. In the present case, it also appears that a proper opportunity of being heard was not given by the ld. CIT(A) while adopting 7 new comparables to work out the adjustment on account of Arm’s Length Price. We, therefore, by considering the totality of the facts, deem it appropriate to set aside this issue back to the file of the ld. CIT(A) to be decided afresh in accordance with law after providing due and reasonable 13 5533 & 3199/Del/2010 RS Components & Controls Ltd. opportunity of being heard to the assessee. The ld. CIT(A) is also directed to decide by passing a speaking as to whether the CUP or RPM or TNMM was the most appropriate method in respect of the international transaction entered by the assessee with its Associated Enterprises (AE).

As regards to the another issue relating to the bad debts, it is noticed that the ld. CIT(A) confirmed the disallowance made by the AO only on this issue that the assessee could not furnish any detail to substantiate that the debts in fact became bad. However, he has not considered this fact as to whether the assessee had written off the debts in its books of account which is the basic requirement to claim the bad debts. Therefore, this issue is also set aside to the file of the ld. CIT(A).

As regards to the appeal in is concerned, it is an admitted fact that it relates to the penalty levied by the AO and sustained by the ld. CIT(A) u/s 271(1)(c) of the act, which is directly connected with the quantum addition in ITA No. 575/Del/2009, which we have restored to the file of the ld. CIT(A). Therefore, the issue relating to the penalty u/s 271(1)(c) of the Act is also 14 ITA Nos. 575/Del/2009 5533 & 3199/Del/2010 RS Components & Controls Ltd. restored to the file of the ld. CIT(A) to be decided afresh alongwith the appeal on quantum addition after providing due and reasonable opportunity of being heard to the assessee.

In the departmental appeal in 2005-06, the issue relates to the deletion of transfer pricing adjustment made by the TPO/AO.

The facts related to this year are identical to the facts involved in the earlier assessment year 2004-05, which we have adjudicated in the former part of this order and the matter has been restored to the file of the ld. CIT(A) who had substituted comparables selected by him by discarding the comparables selected by the TPO. Therefore, by considering the similarity in the facts for the assessment year under consideration vis-à-vis the assessment year 2004-05 (supra) this issue is also restored back to the file of the ld. CIT(A) to be decided afresh in accordance with law after providing due and reasonable opportunity of being heard to both the parties.