2022 (5) TMI 1524 - AT - Income Tax

TP Adjustment - comparable selection - TPO aggregating both the CP division and GIC division - AR reiterated that CP division provides market analysis and consulting services; while GIC division provides low end back office support services to its AE - HELD THAT - Five companies cannot be considered as comparable companies to the GIC division providing back office support services. Accordingly we direct the Assessing Officer/TPO to not include these five companies while determining ALP of international transactions of GIC division. With these observations we set aside the issue of determining ALP of international transaction in GIC division. Disallowance u/s 40(a)(ia) - there was double disallowance as contended by the assessee - amount consisted of two disallowances and in the Tax audit report one amount was again reported in Clause 27(b)(i) of the tax audit report and hence it was disallowed again under section 40(a)(ia) - HELD THAT - Since the claim of the assessee requires verification we restore this issue to the file of Assessing Officer to examine the claim that this disallowance pertains to non-STPI unit. After carrying out due verification the AO may take decision in accordance with law. Needless to mention the Assessing Officer should eliminate double disallowance from the concerned unit only. Unreconciled entry relating to credit card expenses appearing in AIR statement - AO noticed that there was difference in the amount of credit card expenses between the books of accounts and AIR statement - AO disallowed the difference since the assessee did not furnish relevant details - HELD THAT - As AR submitted that the assessee may be provided with an opportunity to explain its case before the AO and furnish the details - we restore this issue to the file of the Assessing Officer for examining it afresh. If the assessee is not able to furnish the details to the satisfaction of the Assessing Officer then the Assessing Officer is free to take appropriate decision in accordance with the law. Rejection of claim for bad debts written off - Additional claim of assessee - contention of Ld A.R that the amount so written off as bad debts against the debtors account is allowable as deduction under section 36(1)(vii) - HELD THAT - Since the claim of the assessee appears to be in accordance with the law and since it is the duty of the AO to determine correct total income we admit the above said additional claim of the assessee. Deduction claimed under section 36(1)(vii) can be allowed if the assessee has complied with the provisions of sec. 36(2) of the Act. Hence this claim of the assessee in our view requires verification at the end of AO. Accordingly we restore this issue to the file of the Assessing Officer for examining it in accordance with law. TP adjustment restricted to the international transactions entered with the AEs of the assessee - HELD THAT - As relying on case of Ognibene India (P) Ltd 2019 (8) TMI 1862 - ITAT PUNE we hold that the Ld DRP was justified in giving the direction to restrict transfer pricing adjustment to international transaction entered with AR.

Summary

Issues Involved:
1. Transfer pricing adjustment
2. Disallowance under section 40(a)(ia) of the Act
3. Addition relating to credit card expenses
4. Disallowance of claim of bad debts

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee, a group company of Frost and Sullivan, New York, USA, operates through two divisions: Consulting Practice (CP) Division and Global Innovation Centre (GIC) Division. The CP Division provides market analysis and consulting services to both local and foreign clients, including its Associate Enterprise (AE), while the GIC Division provides back office support services exclusively to its AE. The Transfer Pricing Officer (TPO) aggregated transactions of both divisions and determined the arm's length price (ALP) by selecting sixteen comparables, resulting in an adjustment of Rs. 7,11,54,249/-. The Dispute Resolution Panel (DRP) directed the TPO to restrict the adjustment to international transactions with AE only, reducing the adjustment to Rs. 3,78,18,466/-. The Tribunal restored the issue to the TPO, directing separate benchmarking for CP and GIC divisions. It also excluded five comparable companies (Accentia Technologies Ltd., Acropetal Technologies Ltd., Coral Hub Limited, Eclerx Services Ltd., and Genesys International Corporation Ltd.) from the GIC division's comparables based on judicial precedents.

2. Disallowance under Section 40(a)(ia) of the Act:
The assessee had disallowed Rs. 21,70,496/- under section 40(a)(ia), reported in the tax audit report. This amount included Rs. 16,01,092/- which was disallowed again, resulting in double disallowance. The DRP directed the Assessing Officer (AO) to verify the claim, and the AO accepted the double disallowance but reduced it from the income of the STPI unit instead of the non-STPI unit. The Tribunal restored the issue to the AO for verification and correction, ensuring the double disallowance is eliminated from the correct unit.

3. Addition Relating to Credit Card Expenses:
The AO disallowed Rs. 61,215/- due to unreconciled credit card expenses between the books of accounts and AIR statement. The DRP confirmed this disallowance. The Tribunal restored the issue to the AO, allowing the assessee an opportunity to explain and furnish relevant details. If the assessee fails to provide satisfactory details, the AO may take appropriate action according to the law.

4. Disallowance of Claim of Bad Debts:
The assessee claimed a deduction of Rs. 8,74,282/- as bad debts under section 36(1)(vii), which was not debited to the profit and loss account but to the "Provisions for bad debts" account. The DRP rejected the claim, stating that new claims could only be made through a revised return, as per the Supreme Court's decision in Goetz (India) Ltd. The Tribunal admitted the claim, noting that it aligns with legal provisions, and restored the issue to the AO for verification and allowance if compliant with section 36(2).

Revenue's Appeal:
The revenue contested the DRP's direction to restrict the transfer pricing adjustment to international transactions with AE. The Tribunal upheld the DRP's direction, referencing the Pune Tribunal's decision in Ognibene India (P) Ltd vs. DCIT and the Bombay High Court's decision in CIT v. Firestone International (P.) Ltd., which support restricting adjustments to international transactions only.

Conclusion:
The Tribunal allowed the assessee's appeal, directing separate benchmarking for CP and GIC divisions, correcting double disallowance under section 40(a)(ia), providing an opportunity to reconcile credit card expenses, and admitting the bad debts claim for AO's verification. The revenue's appeal was dismissed, affirming the restriction of transfer pricing adjustments to international transactions with AE.