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2015 (3) TMI 494 - AT - Income TaxRe-working of the profits invoking section 10A r.w.s. 80-IA(10) - Usage of arithmetic mean as per the transfer pricing study report for determination of 'ordinary profits' for the purpose of section 10A(7) read with section 80IA(10) - Held that:- Result of the Transfer Pricing assessment can at best be taken as an indicator for the Assessing Officer to investigate as to whether or not there exists any arrangement which has resulted in more than ordinary profits qua the requirements of section 10A(7) r.w.s. 80-IA(10) of the Act. Even if it is accepted that the difference between the operating margins of the assessee and the comparables show existence of more than the ordinary profits in the hands of the assessee, so however, it was still imperative for the Assessing Officer to establish on the basis of substantive evidence and corroborative material that qua section 10A r.w.s. 80-IA(10) of the Act, the course of business between the assessee and the associated enterprises is so arranged that the business transacted between them produces to the assessee more than the ordinary profits with the intent of abusing tax concession. Quite clearly, in the entire assessment order, there is no whisper of any material or evidence in this regard. holding that in the present case, the Assessing Officer has not proved that any arrangement had been arrived between the parties which resulted in higher profits. Consequently, the re-working of the profits by Assessing Officer by invoking section 10A r.w.s. 80-IA(10) of the Act is not justified. The action of the Assessing Officer to restrict the deduction u/s 10A of the Act to ₹ 7,74,60,281/- as against the claim of ₹ 36,35,09,382/- is hereby set-aside. Thus, assessee succeeds on this aspect. - Decided in favour of assessee. Transfer pricing adjustment - computation of arm's length price with its associated enterprises in respect of System Integration segment of the assessee - adoption of most appropriate method - Held that:- The objective of adopting the most appropriate method, which in the present case is TNM Method, is to determine the arm's length price of the international transactions. Therefore, the adjustment, if any that is required to be made as a consequence of the application of the most appropriate method is to be made with respect to the value of the international transactions entered with associated enterprises alone. Thus the adjustment which is made by the TPO on the entire turnover of the System Integration segment of the assessee is erroneous and that it should be restricted to the international transactions entered with associated enterprises alone. - Decided in favour of assessee. Value of transactions with associated enterprises is only ₹ 67,25,00,000/- as against the transactions with non-related parties of ₹ 30,82,00,000/- comprised in the transactions considered by the TPO - Held that:- We uphold the plea of the assessee that the determination of the Transfer Pricing adjustment, if any, should be restricted to the value of the international transactions carried out by the assessee with its associated enterprises. - Decided in favour of assessee. Exclusion of Hindustan Dorr-Oliver Ltd. from the final set of comparable - the said concern has been excluded on the ground that it has not incurred any bad debts - Held that:- ncurrence of bad debts in the course of carrying on business is a generally accepted incident of business. The bad debts incurred in the course of carrying on of business is a commercial loss which is indeed permissible as a deduction while computing the profits, subject of-course to the prescribed conditions under the statute. Nevertheless, de hors the provisions of the Act, in common parlance also bad debt is understood as a charge against the profits of the business. So however, the vagaries of the business are such that it may be possible that in a particular year a concern may not incur bad debts at all or it may also happen that in a particular year, certain extraordinary bad debts are incurred by a concern. Be that as it may, without going into merits of the filter setup by the TPO to exclude those concerns who have not incurred any bad debts at all, in the context of Hindustan Dorr-Oliver Ltd., we find that assessee has justifiably pointed out that the incident of bad debts, liquidated expenses is present. Therefore, in our view, the said concern has been inadvertently excluded from the final set of comparables, even if one goes with the filter applied by the TPO. - Thus we direct the Assessing Officer/TPO to include the said concern in the final set of comparables. - Decided in favour of assessee.
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