Balance needs to be maintained between the principle of consistency and the rule of res judicata

The ld. AR vehemently argued about the determination of the ALP for the current year by the assessee in the same way as was done in earlier years. It was stated that since such method was accepted by the TPO for the earlier years, the same ought not to have been rejected for this year. In the oppugnation, the ld. DR stated that res judicata does not apply to income tax proceedings and hence the factum of the TPO having accepted such wrong method of determining the ALP in the preceding years, was not relevant in so far as the current year was concerned.

The Hon’ble Supreme Court has held in several cases  including M.M. Ipoh & Ors. vs. CIT (1968) 67 ITR 106 (SC) that : `The doctrine of res judicata does not apply so as to make a decision on a question of fact or law in a proceeding for assessment in one year binding in another year.’ At the same time, it is equally true that the principle of consistency has also been advocated by several Hon’ble courts including the Hon’ble Supreme Court in Radhasoami Satsang vs. CIT (1992) 193 ITR 321 (SC) and the Hon’ble jurisdictional High Court in CIT vs. Arthur Andersen & Co. (2009) 318 ITR 229 (Bom) by holding that the decision made in earlier years is binding in subsequent years and should be followed. From the above decisions, it follows that a delicate balance needs to be maintained between the principle of consistency and the rule of res judicata depending upon the facts and the governing legal position prevailing in each case. At the same time, we want to highlight that the doctrine of estoppel together with its exceptions cannot be ignored. It is trite that there can be no estoppel against the provisions of the Act or the binding interpretation given to such provisions by the judicial forums. This rule has been cited with approval by several courts including the Hon’ble Supreme Court in CIT vs. V.MR.P. Firm (1965) 56 ITR 67 (SC). Where the facts of a case prima facie show that the authorities took a clearly incorrect view on the provisions of the Act in an earlier year, whether favoring the assessee or the Revenue, it cannot be argued in the subsequent year that the same incorrect approach should be repeated. The Hon’ble Delhi High Court in CWT vs. Meattles (P) Ltd. (1984) 156 ITR 569 (Del) has held that the Revenue authorities cannot be stopped from taking a correct view of statutory provisions in a later year.

We have elaborately discussed above that how the method employed by the assessee for determining the ALP in respect of international transactions for the year under consideration is contrary to the statutory provisions having no approval from any judicial forum. If such a wrong method has been inadvertently accepted by the TPO in an earlier year, we cannot grant a license to the assessee to continue calculating the ALP in such a grossly erroneous manner in perpetuity. It needs to be discontinued forthwith. We, therefore, reject this contention advanced on behalf of the assessee that the application of such a wrong method be granted a seal of approval on the basis of its acceptance by the TPO in a preceding year.

Transfer Pricing: Foreign AE cannot be the tested party. TP additions can exceed overall group profits

The contention of the assessee that the authorities cannot go beyond the overall profit of the group of AEs in determining the ALP of the international transaction is also not acceptable because it will constitute a new method/ yardstick for determining the ALP. The transfer pricing adjustments made in India may result in the overall profit earned by all the AEs taken as one unit being breached;

ITAT MUMBAI BENCHES “K

ITA No.7985/Mum/2010 :

Asst.Year 2006-2007

M/s.Onward Technologies Limited

Vs.

The Dy.Commissioner of Income-tax (OSD) Range 8(1), Mumbai.

 Date of Pronouncement : 30.04.2013