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2020 (8) TMI 12 - AT - Income TaxTP Adjustment - benchmarking the transaction of Direct Sales Compensation (‘DSC’) - Whether commission of 2 % of sales made by the associated enterprises (‘AE') in India charged by the Appellant was consistent with the group pricing policy and practice followed globally by other group entities, and hence, the same is at arm's length? - HELD THAT:- We follow the order of the Co-ordinate Bench for the immediate previous assessment year 2009-10 and direct the AO to adopt rate of commission @ 3.93% in place of 8.61% done by him and pass consequential order after due verification. Needless to say, the AO would give reasonable opportunity of being heard to the appellant before passing the order. Bad debts written off - bad debts written-off were considered as operating expenses for the purposes of computing operating margin of the Centre of Excellence in Engineering (‘COEE’) segment of the Appellant which was accepted to be at arm's length by the TPO - HELD THAT:- In the instant case, the amount of bad debts written off by the appellant has been considered as a part of operating expenses for the ‘Engineering Segment’, which has been benchmarked by the appellant using TNMM method. This is evident from the documents filed before the TPO. As per the benchmarking exercise undertaken in the transfer pricing study, four comparable companies were identified who have earned an arithmetic mean operating margin of 10.24% vis-à-vis operating profit margin earned by the appellant under ‘Engineering Services Segment’. TPO has accepted the operating margin of ‘Engineering Services Segment’ to meet the arm’s length test, after considering the impact of bad debts written off. It is found that even if bad debts are considered as non-operating in FY 2009-10, the appellant’s ‘Engineering Segment’ would still meet the arm’s length test. Further, we find that the TPO has not applied any method while disallowing the bad debts written off and has done the same on an ad-hoc basis - we delete the adjustment made by the AO towards bad debts written off. Adjustment of royalty payment - TPO held that since ‘Earnings Before Interest and Tax’ (‘EBIT’) of the ‘Project Activity’ segment is negative, no royalty is required to be paid by the appellant - appellant has filed before the Tribunal certificate from the management stating that the “Building Efficiency” segment comprises of “Project Activity” segment as well as “Engineering Segment” and the appellant has filed additional evidence vide letter dated 03.07.2019 i.e. a certificate from Chartered Accountant supporting the contentions of the appellant that ‘Building Efficiency’ segment (i.e. aggregate of Project Activity segment and Engineering Segment) had a positive EBIT and accordingly royalty is paid as per the Royalty Agreement - HELD THAT:- Documents filed on 11.12.2017 and 03.07.2019 are quite relevant for the purpose of deciding the issue arising before us. Therefore, we admit the above additional evidence. However, we find that in the instant case, the AO has passed the order u/s 143(3) r.w.s. 144C(13) for AY 2010-11 on 19.12.2014 and for AY 2011-12 on 30.11.2015. Therefore, we deem it fit to remit the matter to the file of the AO/TPO to pass an order after examining the above documents. Short grant of taxes deducted at source - HELD THAT:- We direct the AO to grant the credit for balance TDS amounting to ₹ 4,72,467/- to the appellant, after due verification. Non-grant of credit of advance tax - HELD THAT:- We direct the AO to grant the credit for advance tax paid by the appellant of ₹ 3,47,603/- for the impugned assessment year, after due verification. Set off available brought forward business loss and unabsorbed depreciation against the total income computed for the impugned assessment year, after due verification and as per the provisions of the Act.
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