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TMI Blog2023 (7) TMI 603X X X X Extracts X X X X X X X X Extracts X X X X ..... Employee Contribution Employer Contribution and disallow the amount not paid within the due date as per the judgment of Checkmate Services Pvt. Ltd. [ 2022 (10) TMI 617 - SUPREME COURT] MAT - Section 115JB on provisions for Doubtful Debts - HELD THAT:- All the debts which have been rightly obliterated even though the terminology used was provision was directed to be excluded from the purview of computation of Section 115JB. Adjustment u/s 92CA(3) - MAM selection - TPO compared the price charged by the assessee from its AEs for each transaction with the weighed average selling price (WASP) of the sales made by it to third parties - As argued TPO arbitrarily adopted third parties sale transaction and in most of the cases compared the selling price of different grades of GHERKINS sold to the AEs with the WASP of different grades sold to the third parties - HELD THAT:- We hold that internal CUP is the most appropriate method for undertaking the determination of Arm s Length Price. Hence, we direct that the economic analysis be conducted afresh by taking into consideration the like with the like and following right foreign currency conversion. The AO is also directed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered for determination of the arm s length price of such guarantees. The Hon ble Court held that there would be a difference between the lending rate and borrowing rate in each country. The Hon ble Court held in case of a capital investment, the borrowing rate will apply, whereas in case of credit allowed to a customer on sale of goods, the lending rate would apply. With regard to Corporate Guarantees, the Co-ordinate Bench of ITAT in the case of Kohinoor Foods Ltd. [ 2015 (7) TMI 147 - ITAT DELHI] held that commission at the rate of 1% is fair and reasonable. In Havells India Ltd. [ 2022 (5) TMI 685 - ITAT DELHI] the corporate guarantees determined @ 0.5%. In the specific facts of the instant case, we hold that 0.5% can be considered as the justifiable corporate guarantee commission. Disallowance u/s 36(1)(iii) - AO disallowed the interest on the amounts invested in the subsidiary company - CIT(A) relying on the judgment of Hero Cycle [ 2015 (11) TMI 1314 - SUPREME COURT] held that the disallowance of interest on the investments in the subsidiaries cannot be disallowed in the absence of evidence that the said investment had no element of commercial expediency from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ERPRISE . 3.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the order of the AO/TPO in making transfer pricing adjustment of Rs. 3,21,37,116/- in respect of export of goods by the Appellant to its Associated Enterprise (AE). 3.2 The CIT(A) erred in not holding that in absence of application of mind of the AO to the transfer pricing adjustment proposed by the TPO, the assessment order passed by the AO in respect of this addition is bad-in- law u/s. 92CA( 4), prior to its amendment vide Finance Act, 2007. 3.3 The Ld. CIT(A) erred in not holding that the approach adopted by the A O/TPO in computing arm's length price under the comparable uncontrolled price method was unjustified and also does not consider the impact of variation in geographical markets, volume of sales, level of market, date of transaction, etc. between the AES and non-AES , while determining the arm's length price of the transaction. 3.4 The Ld. CIT(A) erred in upholding the order of the A O/TPO of not allowing the adjustment for permissible variance of 5% rangementioned in proviso to section 92C( 2) of the Act. 3.5 The CIT(A) erred in ig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the arm's length price and the transaction price has been wrongly computed by the TPO as Rs. 790,535 instead of Rs. 602,350/-. GROUND V: DISALLOWANCE OF PROVISION FOR BAD AND DOUBTFUL FARMER ADVANCES OF RS. 61,86,982/-. 5.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in not adjudicating the issue of deduction of provision for bad and doubtful farmer advances of Rs. 61,86,982. 5.2 The Ld. CIT(A) further erred in not holding that in view of the decision of the Hon'ble Supreme Court in the case of Vijaya Bank vs. CIT (190 taxman 257) (2010), where the provision is rightly made by debiting the amount of bad debt to the profit and loss account so as to reduce the profits of the year and simultaneously, the amount of loans and advances or debtors is reduced and consequently, the provision account stands obliterated, then there was actual write off and therefore, the same is allowable under the provisions of the Act. 5.3 The Appellant humbly prays that it be held that the provision for bad and doubtful farmers advances is allowable as deduction/business loss under the provisions of the Act. GROUND VI: DISALLOWAN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contributions to Provident Fund is allowable as deduction/business loss under the provisions of the Act since the same was deposited within the due date of filing of return of income as required by the first proviso to section 438 of the Act. GROUND IX: DISALLOWANCE OF EMPLOYER'S CONTRIBUTION TO PROVIDENT FUND OF RS. 33,80,326/-. 9.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in not adjudicating the issue of disallowance of employer's contributions of Rs. 33,80,326/- to Provident Fund. 9.2 The Appellant humbly prays that it be held that the employer's contributions to Provident Fund is allowable as deduction/business loss under the provisions of the Act since the same was deposited within the due date of filing of return of income as required by the first proviso to section 43B of the Act. GROUND X: DISALLOWANCE OF EMPLOYEES' CONTRIBUTION TO EMPLOYEE STATE INSURANCE CORPORATION OF RS. 91,935/-. 10.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in not adjudicating the issue of disallowance of employees' contributions of Rs. 91,935/- to Employee State Insurance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TED TO RS. 61,86,982/- 13.1 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not restricting the addition of provision for bad and doubtful farmer advances of Rs. 1,56,84,359/- to RS. 61,86,982/-, which is actual amount of provision created during the year, debited to the profit and loss account and claimed as deduction while computing the book profit. 13.2 The Appellant humbly prays that if the addition of provision for doubtful farmer advances to the book profit is upheld, the said addition should be restricted to only Rs. 61,86,982, since the Appellant had claimed only that amount as deduction. GROUND XIV: ADDITION OF PROVISION FOR BAD AND DOUBTFUL TRADE DEBTORS OF RS. 14,39,391 TO THE BOOK PROFITS U/S. 115JB. 14.1 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the order of the AO of treating the provision for bad and doubtful trade debtors of Rs. 14,39,391 as provision for diminution in value of assets and thereby, adding the same to the book profits u/s. 115JB of the Act. 14.2 The Ld. CIT(A) further erred in not holding that where the provision is rightly made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational jurisprudence recognize the reality that there cannot be an exact comparable in a given situation without any differences without appreciation that such astringency will defeat the purpose of flexibility provided in comparability analysis for determination of ALP. ITA No. 2232/Del/2017: A.Y. 2003-04 (Assessee) Inventory Written off: 4. At the outset, it was submitted that the assessee has not claimed deduction in the P L account and hence no disallowance is called for. We are in agreement with the contention of the ld. AR that no disallowance is called for unless claimed in the P L account. The AO is directed to examine and delete the addition after verification in case the expenditure is not claimed in the P L account. Administrative Expenses Ballarpur Industries: 5. The similar expenses disallowed by the revenue have been allowed by the revenue for A.Y. 2007-08 and A.Y. 2010-11 and by the ITAT vide order dated 19.01.2023 in ITA No. 1931/Del/2017 for A.Y. 2002-03. In the absence of any change in the factual matrix, we hereby direct that the addition be deleted. Provision for Bad Doubtful Debts/Farmers Advance: 6. The AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength price. 13. The TPO held that the documentation does not contain any indication and material as to how the CUP has been applied by the assessee company. The TPO also held that after going through the Transfer Pricing report it could not be ascertained whether the assessee company is relying upon CUP or is intending to apply Transactional Net Margin Method (TNMM). 14. The assessee company submitted data pertaining to sale of goods to associated enterprises and comparable prices charged from unrelated parties. In these circumstances it was submitted before the revenue that Comparable Uncontrolled Price Method (CUP) is the most appropriate method to benchmark the international transactions carried out by the assessee company. 15. Out of the total export of Rs. 51.33 crores during the year under reference of processed gherkins, the assessee company made total export exports worth 16.93 crores is to the related party (Tiffy International B.V.) and the remaining about 34 crores to unrelated parties. The nature of the products sold to the related party is similar to what is being sold to unrelated parties. In these circumstances when an exact comparable price of the produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sr. No. Product Difference 1 Gherkins in Vinegar (Bulk) 78,51,397 2 Gherkins in Vinegar (Jars) 1,97,78,014 3 Gherkins in acetic acid (Jars) 35,68,309 Total 3,11,97,720 Annexure II 1 Gherkins in Vinegar (Cans) 3,79,772 2 Gherkins in Brine (Bulk) 5,59,624 3 Non Gherkins product - Total 9,39,396 21. The total difference in sale price and arm's length price of gherkin products was therefore Rs. 3,21,37,116/- being the total of Rs. 3,11,97,720/- and Rs. 9,39,396/-. 22. The TPO held that the assessee company did not furnish any reply and no objection of any kind was filed against the aforesaid calculation. Keeping in view the facts, the TPO determined the ALP of the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. If there is any difference between the two prices, this may indicate that the condition of the commercial and financial relations of the AEs are not at arm s length, and that the price in the uncontrolled transaction may need to be substituted for the price in the controlled transaction. Para 2.19 Under the CUP method, the arm s length price for commodity transactions may be determined by reference to comparable uncontrolled transactions and by reference to comparable uncontrolled arrangements represented by the quoted price . 30. The steps involved in the application of this method are: i. Identify the price charged or paid in comparable uncontrolled transactions; ii. The above price should be adjusted for transaction level differences on the basis of functions performed, assets used and risks taken (FAR) analysis and enterprise level differences if any; iii. The adjusted price is the arm s length price; 31. Reasonable and accurate adjustment can be made for differences in: a. Type and quality of products b. Delivery terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjudicated above in this order. TP Adjustment: 42. Not pressed owing to smallness of amount. Provision for bad debts farmers/trade: 43. Directed to be allowed on actual write off basis. Loss on Foreign Exchange Fluctuation: 44. The AO disallowed the loss on exchange fluctuation holding it to be notional. The AO held that actual loss would arise only at the time of remittances and not before. The AO also held that the assessee may make entries in the books of accounts as per the Companies Act but income has to be computed as per the provisions of Income Tax Act. The ld. CIT(A) concurred with the order of the Assessing Officer on the grounds that the basic fact relating to the cancellation of forward contract pertaining to which the losses claimed have not been submitted. Keeping in view, the judgments of Hon ble Apex Court in the case of ONGC Vs. CIT 322 ITR 180 and CIT Vs. Woodward Governor 312 ITR 254, we hold that the Loss on Foreign Exchange Fluctuation is an allowable expenditure. Set off of C/F Business Loss: 45. The ld. CIT(A) has dismissed the grounds taken up holding that the appeal memo for the year doesn t elaborate or shed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given above. Profits u/s 115JB: 49. All the debts which have been rightly obliterated even though the terminology used was provision was directed to be excluded from the purview of computation of Section 115JB. ITA No. 1307/Del/2017 : A.Y. 2007-08 (Revenue) Deletion of Inventory of Rs. 28,97,157/-: 50. The facts of the case and adjudication of the ld. CIT(A), Ms. Y. Kakkar is as under: 5.2 The list of goods written off are part of same and in a fast moving standard/norms confirming packaged food products (perishable) and having limited shelf life having a stock of damaged goods or bundle of labels/wrappers/cartons etc., no longer needed is not uncommon and is a practical reality as its not necessary to have a bulk repeat orders of supply of gherkins from the same house to whom the first bulk lot has been dispatched (and for whom bulk wrappers/cartons etc. were procured to obtain quantity advantage etc.). The assessee has already written off the said goods in accordance with law and as such the matter needs to be decided in favour of appellant. The AO also strangely disallowed 50% of the total sums written off by the appellant of Rs. 57,94,313/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayer, AE has paid interest to the banks comparable to the prevailing rates in the market. However, the assessee has not furnished any evidence in support of this claim. Another question arise here that if taxpayer has given Corporate Guarantee to an unrelated party, it would have charged similar to that of prevailing in the market where taxpayer is residing in. Hence, argument of the assessee is not acceptable 59. The TPO made an adjustment of Rs. 2,07,11,520/- after calling for information from varied banks. 60. It was submitted that a lower guarantee fees is in order as the guarantee was advanced to a party under the same management and control of the appellant (being its AE) and the re-exist decision ranging from holding that corporate guarantee fee should not be charged. The ld. CIT(A) relying in case of Kohinoor Foods Ltd [2014] 54 taxmann.com 454 held that corporate guarantee fee of 1% to be reasonable. 61. Heard the arguments of both the parties and perused the material available on record. 62. The issue of considering the corporate guarantees as an International Transaction amenable to adjustment has been settled by the order of the Hon ble High Court of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curing debt. 65. The Hon ble Court held that there would be a difference between the lending rate and borrowing rate in each country. The Hon ble Court held in case of a capital investment, the borrowing rate will apply, whereas in case of credit allowed to a customer on sale of goods, the lending rate would apply. With regard to Corporate Guarantees, the Co-ordinate Bench of ITAT in the case of Kohinoor Foods Ltd. Vs. ACIT in ITA No. 3689/Del/2012 vide order dated 21.06.2014 held that commission at the rate of 1% is fair and reasonable. In Havells India Ltd. 140 Taxmann.com 575, the corporate guarantees determined @ 0.5%. In the specific facts of the instant case, we hold that 0.5% can be considered as the justifiable corporate guarantee commission. Write off- Trade Debts/Farmer Advance: 66. Write off to be allowed on actual basis. Provision- 115JB: 67. As adjudicated above in this order. ITA No. 1308/Del/2017 : A.Y. 2010-11 (Revenue) Corporate Guarantees: 68. As adjudicated above in this order. Disallowance u/s 36(1)(iii): 69. The AO disallowed the interest on the amounts invested in the subsidiary company. The ld. CIT(A) relying ..... X X X X Extracts X X X X X X X X Extracts X X X X
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