Assessing Officer Cannot Apply Wrong Method In Absence Of Audited Financials Of AE: Delhi ITAT

The appellant/assessee company, Olympus India, incorporated on October 20, 2009, is a wholly owned subsidiary of Olympus Corp. The company is engaged in the import and resale of medical equipment like gastrointestinal endoscopes, surgical endoscopes, endotherapy devices, endoscopic ultrasound systems, and medical information systems. In addition, the assessee is also engaged in the installation, repair, and maintenance of this equipment in India.

The assessee e-filed its return of income and showed the loss. The case was selected for scrutiny through CASS. It was noted that the assessee company had conducted international transactions with its associated enterprises. Therefore, a reference under section 92CA(1) of the Income Tax Act was made to the Transfer Pricing Officer (TPO) for determining the arm's length price. Subsequently, a draft assessment order under section 143(3) read with section 144C of the Income Tax Act was passed, proposing Transfer Pricing Adjustment on the basis of TPO's order.

In response to the draught assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP disposed of the objections by confirming the additions proposed in the draft order. An assessment order was passed under section 143(3) read with section 144C of the Income Tax Act, assessing the total income of the assessee.

Aggrieved by the Assessment Order, the assessee preferred an appeal before the Tribunal. The Tribunal remanded the matter to the file of AO/TPO with a direction to determine the question as to whether the existence of international transactions triggering ALP expenses or not, and if the international transaction was found to be in existence, the direction to determine the ALP of such international transactions.

After the remand, a fresh reference was made to the TPO to determine the arm's length price under Section 92CA (3) of the Income Tax Act in respect of the international transactions entered into by the assessee company with its associated enterprises (AEs) during the financial year 2011–12 relevant to the assessment year 2012–13.

It was observed that, since the assessee had failed to provide audited financials of all its AEs to determine the overall profits incurred by the group, it adopted the Resale Sale Method (RSM) using the Bright Line Test (BLT) approach. Accordingly, an order under section 92CA(3) of the Act was passed by the TPO enhancing the income of the assessee.

The issue raised was whether the Profit Split Method (PSM) adopted by the AO in determining the Arm Length Price (ALP) of the advertisement marketing and promotion (AMP) expenses was proper or not.

The assessee made two-fold arguments. Firstly, the TPO/AO is erroneous in adopting the Profit Split Method (PSM) in determining the ALP of the AMP expenses, and the Profit Split Method (PSM) was the most appropriate method for the determination of the ALP of the AMP expenses. Secondly, since the AO has failed to determine overall profits accruing to the group, and in the absence of the audited financials of the AEs, the TPO/AO cannot make an adjustment.

The department contended that the assessee had not provided the audited financials of the AE to determine the overall profits accruing to the group, and that, under Section 92D of the Act, the assessee was required to keep all of the AE's information and documents. In this case, the TPO/AO applied the Most Appropriate Method (MAM) as defined in Rule 10C of the Income Tax Rules and, in the absence of the AE's financials, the RPSM method as defined in Rule 10C(c). was duty bound to submit the audited financials of the AE for the proper application of the PSM method. For failure to submit the documents, an adverse inference can be drawn by the TPO/AO and justify the Assessment Order by applying the Residual Profit Split Method (RPSM) in the determination of the ALP of the AMP expenses of the Assessee.

"In our opinion the TPO/Assessing Officer cannot apply the wrong method in the absence of material ie: audited financials of AE. On the other hand, TPO/AO cannot even give the benefit as well to the Assessee for non co- operation for providing the audited financials of AE," the ITAT said.

The tribunal directed the assessee to provide all the relevant documents, including the financials of its AE's, if required, failing which the authorities can act in accordance with the law by invoking the relevant provisions.

Case Title: M/s Olympus Medical Systems India Pvt. Ltd. Versus DCIT

Citation: I.T.A. No. 838/DEL/2021

Dated: 20.04.2022

Counsel For Appellant: Advocate Nageshwar Rao

Counsel For Respondent: Departmental Representative Mahesh Shah

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