TMI Blog2018 (4) TMI 1599X X X X Extracts X X X X X X X X Extracts X X X X ..... s AE and for that purpose, we use various methods including TNMM as per which, the profits of tested party and uncontrolled comparables are compared to come to conclusion that prices are at arms length or not. If the provision for doubtful debts is reduced from profit, the numerator is reduced but the denominator is not reduced because the turnover has been considered in earlier year and cannot be considered in the present year. Hence such provision for doubtful debts has to be ignored and added back in the profit of the tested party or of the comparable as the case may be while making the TP analysis. Hence on this issue, we find no reason to interfere in the order of AO and DRP. Exclusion of comparable - selection criteria - Held that:- Set aside the order of AO/TPO/DRP on this aspect i.e. the final list of comparables and the matter is restored back to the file of AO/TPO for fresh decision with the direction that the AO/TPO should examine and decide afresh this aspect i.e. list of final comparables by deciding the functionality aspect as well as turnover filter aspect and while doing so this, judgment of Hon’ble Delhi High Court rendered in the case of Chryscapital Investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in rejecting the use of multiple year data, without considering that the past year's data had an influence on the determination of arm's length price and that the Appellant had considered contemporaneous data available at the time when it carried out the benchmarking study having regard to the statutory requirement to maintain the TP documentation by the specified date. 4.2 The Hon'ble DRP and the learned AO / TPO have erred in law, on facts and circumstances of the case by ignoring the provision of the Rule 10B(4) of the Rules, international commentaries and judicial pronouncements, which advocate usage of multiple year data of comparable companies for the purpose of determination of the arm's length price. 5. Computation of operating profit margins of comparable companies The Hon'ble DRP and the learned AO / TPO have erred in law and on facts in considering provision for doubtful debts to be non-operating in nature while computing the operating profit margins of the comparable companies overlooking the fact that the same resulted from company's normal business operations. 6. Comparable companies 6.1 The Hon'ble DRP an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the learned AO / TPO have erred in law by relying upon the information not available in public domain while carrying out the bench marking analysis under the Act. 8. Comparability adjustments 8.1 The Hon'ble DRP and the learned AO / TPO have erred in not making a risk adjustment reducing the arm's length margin determined by the Appellant, disregarding the judicial precedents on the said aspect. 8.2 The Hon'ble DRP and the learned AO / TPO have erred in not appreciating that the Appellant, being a captive service provider operates at lower risk levels as compared to comparable companies, which carry higher risks and accordingly, erred in not granting appropriate risk adjustments. 9. Other transfer pricing related grounds 9.1 The Hon'ble DRP and the learned AO / TPO have failed to appreciate Appellant's commercial judgment about the application of arm's length principle which is tied to the business realities. 9.2 The Hon'ble DRP and the learned AO / TPO have erred in law and on facts, in making several observations and findings which are based on incorrect interpretations of law and contrary to facts of the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any good ground for not permitting the taxpayer to raise the ground before the Income-tax Appellate Tribunal which is clearly arising out of the impugned order. As noted earlier, the revenue has not challenged relevant part of the order of the CIT(A). Therefore, the objection now being taken by the ld. D.R. is not justified. On merit, we see no good reason to exclude provisions written back as not forming part of computing operating profit of the taxpayer. In our considered opinion, exclusion of above provision is based upon misconception of real nature of the entry generating income. It is not practically possible for a businessman to actually disburse all expenses incurred by it in the financial year and, therefore, a large number of business liabilities (manufacturing included) are provided in the accounts of a given year. It is elementary that there is no difference between actual disbursement of an expenditure or provision thereof. However, recovery of liability provided may become barred by limitation or for some other reasons, liability gets unenforceable or is reduced or ceases to exist with the passage of time. Therefore it may be necessary to write back such a liability. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... versed in the books of account as per mercantile system of accounting and shown as income. Therefore on facts we do not see any justification for excluding provisions written back in the profit and loss account as not forming part of the operating profit of the taxpayer. Accordingly claim of the taxpayer is accepted. 6. From the above Para of this Tribunal order, it comes out that in that case, the issue involved was regarding writing back of the provision by the assessee in the present year. The Tribunal order in this case is on this basis that certain liabilities are provided on estimate basis because exact quantification is not possible in the same year for some expenses and when in future year, the actual amount of liability is known then any excess provision made in the earlier year has to be written back and the same has to be considered as operating income for the purpose of computing ALP also. In our considered opinion, this Tribunal order is not applicable in the present case because in the present case, the issue involved is regarding provision for bad and doubtful debts and not writing back of excess provision in earlier years. There is major difference in the natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the turnover has been considered in earlier year and cannot be considered in the present year. Hence such provision for doubtful debts has to be ignored and added back in the profit of the tested party or of the comparable as the case may be while making the TP analysis. Hence on this issue, we find no reason to interfere in the order of AO and DRP and we hold that this Tribunal order is not applicable in the present case but we will also examine the applicability of the second tribunal order cited before us by the learned AR of the assessee. 7. Now we examine the applicability of the second Tribunal order on which reliance has been placed by the ld. AR of assessee i.e. Tribunal order rendered in the case of Kenexa Technologies Pvt. Ltd. vs. DCIT (supra). In this case, there is no such issue regarding provision of bad and doubtful debts. No particular para was referred to by ld. AR of assessee. When we go through this entire Tribunal order, we find that ground nos. 2 and 3 raised in this appeal is similar to the assessee s claim. As per this ground nos. 2 and 3, the issue in dispute was regarding considering foreign exchange loss as operating loss. The Tribunal in that case foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T as reported in 376 ITR 183, it was held that huge profit or huge turnover, ipso facto does not lead to the exclusion of a comparable and the TPO, first, has to be satisfied that such differences do not materially affect the price or cost and secondly, an attempt is to be made for making reasonable adjustment to eliminate the material effect of such differences. The bench pointed out that in view of this finding of Hon ble Delhi High Court, the matter should go back to the file of AO/TPO for fresh decision in the light of this judgment of Hon ble Delhi High Court. In reply, it was submitted by ld. AR of assessee that apart from turnover filter, the assessee is also arguing about the functional comparability. The bench observed that even if it is found that a comparable company is functionally comparable then also turnover filter has to be applied as requested by the assessee and in that situation, this judgment of Hon ble Delhi High Court has to be considered and those aspects as noted above are to be examined and decided and therefore, this will be proper if entire TP matter in respect of list of comparables is restored back to the file of AO/TPO for fresh decision. In reply, bot ..... X X X X Extracts X X X X X X X X Extracts X X X X
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