TMI Blog2017 (5) TMI 1738X X X X Extracts X X X X X X X X Extracts X X X X ..... ect the A.O. to adopt 3.62% as the appropriate rate for benchmarking the Direct Sales Compensation ( DSC ) received by the assessee from its AEs. The Ground of appeal No. 1 to 1.3 raised by the assessee before us are thus allowed. Addition @10% of the expenses incurred on Global Work Space Solutions/Facilities Management - HELD THAT:- Now when the assessee had substantiated its claim towards the expenses on the basis of material made available on the record, then the disallowance of any part of such expense on adhoc basis stood ruled out. We are further not persuaded to accept the observations of the lower authorities that the disallowance of 10% of GWS expenses were carried out in conformity with adhoc disallowance carried out by the A.O in the immediately preceding year, viz. A.Y. 2007-08, which thereafter had been sustained by the Tribunal vide its order [ 2015 (12) TMI 1838 - ITAT MUMBAI] of the assessee. We find that unlike the case of the assessee for the year under consideration, the disallowance of ₹ 2.98 crores, i.e @10% of the expenses was upheld by the Tribunal in A.Y. 2007-08, for the reason that the assessee had failed to substantiate its claim of expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the DRP, would in no way adversely affect the operating margin of the assessee, as the PLI of the assessee, as claimed by the Ld. A.R continues to remain within the parameters of +/-5% variation, as a result whereof no TP adjustment would be called for in the hands of the assessee in respect of the CoEE segment to which such bad debts so pertain, wherein the benchmarking for the said segment had been carried out by adopting TNMM. We thus not being impressed by the aforesaid observations of the lower authorities are thus not persuaded to subscribe to the same, and as such direct the A.O to delete the addition/disallowance so made in the hands of the assessee. - I.T.A. No(s) 638/M/2013 & 691/M/2014 - - - Dated:- 17-5-2017 - Shri G.S. Pannu, AM And Shri Ravish Sood, JM Appellant by: S/shri. RajanVora Nikhil Tiwari, A.R. Respondent by: S/shri .Debashis Chanda B.S. Bist, D.R. ORDER Ravish Sood, JM: The present appeals filed by the assessee are directed against the orders passed by the A.O u/s 143(3) r.w.s. 144C (13) of the Income Tax Act, 1961 (for short Act ) for A.Y. 2008-09 and A.Y. 2009-10, dated. 31.10.2012 and 02.12.2013, respectively. Sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TP adjustment of ₹ 7,70,87,718 made on mere assumptions and surmises under section 92CA(3) of the Act. 1.3. On a without prejudice basis, the Ld. DRP and the Ld. AO (under the directions of the Ld. DRP) erred in not following the directions issued by the Ld. DRP for AY 200607 and AY 2007-08 wherein on identical facts, the Ld. DRP has determined the arm's length rate for direct sales compensation as 5%. 2. Ground No 2 2.1. On the facts and circumstances of the case and in law, the Ld. AO, under the directions of the Ld. DRP, erred in disallowing the expenditure of ₹ 6,28,43,080, being 10% of expenses in relation to facilities management on an estimated basis. 2.2. The Appellant prays that the Ld. AO be directed to delete the ad-hoc disallowance of ₹ 6,28,43,080, being 10% of expenses incurred on facilities management. 3. Ground No 3 3.1 On the facts and circumstances of the case and in law, the Ld. AO, under the directions of the Ld. DRP, erred in disallowing an amount of ₹ 4,00,000 representing write off of earnest money deposit. 3.2. The Appellant prays that the Ld. AO be directed to delete the disallowance of ₹ 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdware, machinery etc. from the clients in India and put orders to the AEs abroad. The assessee raised invoices in the name of the AEs for the service rendered. During the year under consideration the assessee had received Direct Sales Compensation, Marketing Services (DSC) of ₹ 2,27,73,329/- from its AEs, viz. Johnson Controls (S) Pvt. Limited Singapore (₹ 43,46,544/-), York International Pvt. Ltd. Singapore (₹ 1,76,16,925/-) and from York (Shanghai) Air Conditioning Refrigeration International Trading Company Ltd., China (₹ 8,09,860/-) @ 2% of the sales made by the respective AEs to third parties in India. 5. That during the course of the assessment proceedings the A.O made a reference u/s 92CA(1) of the Act to the Transfer Pricing Officer, Mumbai (TPO) on 30.04.2010 for determination of the Arm s Length Price (ALP) in relation to the international transactions detailed in the audit report in Form No. 3CEB of the assessee. BEFORE THE TPO:- 6. That during the course of proceedings it was observed by the TPO that the assessee had during the year carried out the following international transactions: - Sr. No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ork International Ptd. Limited, Singapore 2% The TPO, however, being of the view that as the agreements relied upon by the assessee were with the group entities itself, which could not be taken as a comparable uncontrolled transaction, thus declined to take cognizance of the same. The TPO further rejecting the benchmarking analysis conducted by the assessee, as per which it was claimed that in the case of indenting the CUP method was the most appropriate method, therein adopted the Profit Split Method ( PSM ) as the most appropriate one and 50% of the said profit on the transactions was considered appropriate. The TPO thus quantified the ALP of the commission @ 10.64% of sales, and as such quantified the relatable profits at ₹ 12,11,54,110/-. The net TP adjustment suggested by the TPO thus worked out to ₹ 9,83,80,781/-. DRAFT ASSESSMENT ORDER:- 8. The A.O. on receiving the order passed by the TPO u/s 92CA(3), dated 19.10.2011, therein proposed the followings additions vide his draft assessment order passed u/s 143(3) r.w.s 144(C), dated. 16.12.2011:- (i). The A.O proposed adjustment of ₹ 9,83,80,781/- as suggested by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... higher commission for the assessee, therein referred to the five samples of sales on the basis of which the TPO had concluded that the profit margins indeed was substantially high and as such warranted higher remuneration, and upheld the same. The DRP however observing that the TP had split the profit on 50:50 basis taking GP/Cost ratio of 21.28%, therein directed the TPO to modify his order and split the profit by taking GP/Sales ratio of 17.54%. (c). The DRP dealing with the objection of the assessee that the TPO had erred in applying the Profit Split Method ('PSM') without analyzing as to whether the same was an appropriate method as regards receipt of DSC, as well as had most arbitrarily carried out cherry picking of sample invoices without taking into consideration the functions assumed, assets utilized, and the risks assumed by the assessee and the AEs, therein observed that the TPO had in all fairness going by the fact that it was impossible to analyze the entire population, had thus carried out random selection of data, which could safely be held to be well established and scientific statistical procedure. It was further observed by the DRP that in case the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement: (a). The assessee further submitted before the DRP that the A.O. had erred in proposing to disallow expenses of ₹ 6,28,43,080/- being 10% of the expenses in relation to Facilities Management, and therein requested that the A.O. be directed to delete the said proposed disallowance. The DRP after perusing the order of the A.O. in the backdrop of the submissions of the assessee, therein observed that the A.O. had examined the issue in all fairness. The DRP observed that the A.O. during the course of proceedings before him had sought to verify the transactions of the assessee with different parties, but however, no replies were received by him. The A.O. thereafter brought the aforesaid state of affairs to the notice of the assessee, but the assessee failed to act upon the same and did not obtain the confirmations of the respective parties, as a result whereof the A.O. being left no other alternative, thus guided by a similar disallowance made by his predecessor in the immediately preceding year, which thereafter was sustained by the DRP, therein carried out a disallowance @ 10%. The DRP thus on the basis of his aforesaid observations rejected the objection of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the hands of the assessee:- Particulars Amt (Rs.) Amt (Rs.) Total Income as per return (before set off of loses) Add:Addition / Disallowances (i) Addition under section 92CA(3). (ii) Disallowance of expenditure from facility management business. (iii) Miscellaneous expenses write off of deposits. Less: Brought forward losses Business Loss Unabsorbed depreciation 65,633,07 77,087,718 62,843,080 400,000 46,575,785 205,963,805 44,000,214 90,575,999 , and thus assessed the income of the assessee at ₹ 11,53,87,810/-. 11. The assessee being aggrieved with the order passed by the A.O. u/s 143(3) r.w.s 144C(13), had therein carried the matter in appeal before us. That during the course of hearing of the appeal it was submitted by the Ld. Aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering 5% as an appropriate ALP as held by the Tribunal in the case of Bayer Material Science Private Limited (supra). 10. We have heard both the parties on this issue of the appropriate rate of commission and find the rate of 1.35% (in the case of Cisco Systems (supra) and 1.49% [in the case of Hoganas India Private limited vs. DCIT No.1463/PN/2010] have to be rejected considering the rates approved in the case of Sumitomo Corporation (2.26%) (supra) and Bayer Material Science (5%) (supra). In our opinion, to remove the statistical error, if any, the average of these two comparables should be considered to arrive at the appropriate rate of ALP for benchmarking the impugned transactions. Accordingly, 3.63%, should be appropriate rate to be adopted by the AO for calculating the adjustments to be made. Thus, we partly allow the relevant grounds of the assessee as the case may be. Accordingly, AO is directed to adopt 3.63% as appropriate rate of ALP for benchmarking the impugned transactions. 12. Thus, in the backdrop of the aforesaid facts, it was averred by the Ld. A.R that keeping in view the order passed by the Tribunal in the case of the assessee company for the prec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted before the Tribunal in respect of its appeals for the aforesaid preceding years, viz A.Y. 2006-07 and A.Y. 2007-08 certain case laws, where on similar facts the ALP of commission was decided by the Tribunal. We find that the Tribunal after deliberating on the following case laws relied upon by the assessee, had therein taken the arm s length commission rate of 3.63% :- Particulars Rate of commission accepted Sumitomo Corporation India Private Ltd. vs. Addl CIT (ITA No.5095/Del/2011) 2.26% Bayer Material Science Private Ltd. (ITA No. 7977/Mum/2010) 5% Average 3.63% We have perused the facts of the case and are of the considered view that the issue involved in the present appeal is squarely covered by the order passed by the Tribunal in the assessee s own case for the A.Y. 2006-07 and A.Y. 2007-08 (ITA No. 8722 8855/Mum/2011, dated 31.12.2015), wherein the Tribunal had directed the A.O to adopt 3.63% as the appropriate rate of ALP for benchmarking the Direct Sales Compensation ( DSC ) in the hands of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tely 115%. The Ld. A.R submitted that the Gross profit margin had reduced marginally to 14.85% in A.Y. 2008-09 , as against the GP margin of 15.35% in A.Y. 2007-08. It was submitted by the Ld. A.R that the minimal fall in gross margin by 0.51% was because of competitive market scenario and customer preferences, as a result of which the assessee company was compelled to increase its focus on quality of service and thus compromised, though only to some extent, on its gross margins, which therein resulted into comparative decline during the year under consideration. The Ld. A.R assailing the ad-hoc disallowance carried out by the A.O., therein submitted that during the course of the proceedings, the assessee as directed by the A.O, had vide its submissions dated 17.08.2011 submitted party vise details of purchases and labour expenses exceeding an amount of ₹ 10 lac, wherein the details like name of the vendor, address, PAN, and the amount of the expenditure stood duly reflected. It was thus submitted by the Ld. A.R that total amount for which such party vise details were provided amounted to ₹ 55 crores (approx), which as against the total expenditure of GWS of ₹ 62, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvoices of expenditure on GWS aggregating to ₹ 82,22,049/- on a sample basis during the course of the DRP proceedings. We have given a thoughtful consideration to the facts of the case and are of the considered view that now when the assessee in compliance to the directions of the A.O had placed on record substantial material, viz. complete party vise details of the purchases and labour expenses exceeding ₹ 10 lac amounting to ₹ 55 crores (aprox), which worked out to about 89% of the total GWS expenses, as well as had furnished with the A.O the copies of invoices of expenditure on GWS aggregating to ₹ 82,22,049/-, for verification on sample basis, therefore in the backdrop of the said factual matrix, we are unable to persuade ourselves to subscribe to the adhoc disallowance carried out by the A.O. We are of the firm view that where an assessee had substantiated his claim towards an expenditure by placing on record documentary evidence, then the A.O remains under a statutory obligation to act upon such material and adjudicate on merits the entitlement of the assessee towards such claim of expenditure. We thus in the backdrop of our aforesaid observation, are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a revenue loss, being a debt gone bad. It was submitted by the Ld. AR that the A.O. failing to appreciate the facts of the case in the right perspective, had thus erred in disallowing the aforesaid amount which was claimed as a revenue loss by the assessee. Per contra, the Ld. D.R relied upon the order of the lower Authorities. 17. We have heard the Authorized Representatives for both the parties, perused the orders of the lower authorities and the material produced before us. We are of the considered view that as the aforesaid amount of ₹ 4 lac was given as an advance by the assessee at the start of the project, and thus was never taken into account by the assessee as its income during the year under consideration, or in any of the previous years, therefore, the same did not satisfy the conditions contemplated u/s 36(1)(vii) r.w.s. 36(2) of the Act , and as such could not be allowed as a bad debt in the hands of the assessee. We however find that the assessee had alternatively claimed that as the said loss had been suffered by the assessee in the normal course of its business, therefore, the same was allowable under Sec. 37 r.w Sec. 28 of the Act . We are of the cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , as well as the calculation of interest u/s 244A of ₹ 8,96,857/- by the A.O. We herein restore the aforesaid issues also to the file of the A.O., who is herein directed to re-compute the aforesaid interest u/s 234D and 244A of the Act . The Ground of appeal No. 6 and Ground of appeal No. 7 are thus allowed for statistical purposes. 21. The appeal of the assessee for A.Y. 2008-09, marked as ITA No. 638/Mum/2013 is partly allowed in terms of our aforesaid observations. I.T.A. No(s) 691/M/2014 (A.Y. 2009-10) 1. We now advert to the appeal of the assessee for A.Y. 200910, wherein the assessee challenging the assessment order passed by the A.O under Sec. 143(3) r.w.s 144C(13), had raised the following grounds of appeal:- 1. Ground No 1 On the facts and circumstances of the case and in law, the Deputy Commissioner of Income-tax 8(2), Mumbai ('Ld. AO'), under the directions of the Hon'ble Dispute Resolution Panel ('Ld. DRP') erred both, on facts and in law, in confirming the transfer pricing ('TP') adjustment under section 92CA(3) of the Income Tax Act, 1961 (the Act) made by the Learned Transfer Pricing officer ('Ld. TPO' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Ld. AO be directed to drop the initiation of penalty proceedings under section 271(1)(c) of the Act. 3. Briefly stated, the facts of the case are that the assessee had e-filed its return of income for A.Y. 2009-10 on 30.09.2009 declaring loss of (₹ 7,08,88,790/-), which was processed as such u/s 143(1) of the Act. The case of the assessee was thereafter taken up for scrutiny assessment u/s 143(2). 4. That during the course of assessment proceedings the A.O. made a reference to the Transfer Pricing Officer ( TPO ) for the determination of arm s length price in respect of the assessee s international transactions with its associate enterprises (AEs). 5. The TPO after perusing the international transactions of the assessee with its AEs in the backdrop of the contentions of the assessee, therein carried out a TP adjustment of ₹ 13,52,29,899/- in respect of value of international transactions of Direct Sales Commission ( DSC ) received by the assessee from its AEs, and a further adjustment of ₹ 1,26,36,953/- in respect of bad debts written off. The TPO thus proposed a total adjustment of ₹ 14,78,66,854/- in the hands of the assessee. 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Particulars Amt (Rs.) Amt (Rs.) Total loss as per return (before set off of loses) (70,888,790) Add:Addition / Disallowances (i) Addition under section 92CA(3). 147,866,852 (ii) Earnest Money Deposit W/off. 92,833 147,959,735 ,and thus assessed the income of the assessee at ₹ 77,070,945/-. 8. The assessee being aggrieved with the order of the A.O had therein carried the matter in appeal before us. The assessee had assailed before us the upwards TP adjustment aggregating to ₹ 147,866,852/- made by the A.O/TPO, viz. upward adjustment of DSC of ₹ 13,52,29,899/-, and disallowance of bad debts of ₹ 1,26,36,953/-. 9. We find that the A.O going by the directions of the DRP had therein made an upward TP adjustment of ₹ 13,52,29,899/- as regards the DSC received by the assessee from its AEs. The Ld. A.R. had brought to our notice that the identical issue was involved in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We now take up the disallowance by the A.O of the bad debts of ₹ 1,26,36,953/-. We find that the assessee had incurred the aforesaid bad debt during the year pertaining to CoEE segment, which as claimed by the assessee was due to dispute regarding the work done by the assessee. The Ld. A,R had submitted before us that the assessee which is not a captive service provider of the AEs in the CoEE segments, therein raises bills on the AEs on the basis of hours spent. The Ld. A.R submitted that a dispute surfaced between the assessee and the AEs on the issue as to whether the work for which bill was raised was as per the agreed scope of work, or not. It was due to this dispute, the assessee had written off the debts which pertained to F.Y. 2006-07, 2007-08 and 2008-09, as bad. The Ld. A.R further submitted that as the AEs had disputed the time spent by the assessee on their project, therefore to resolve the said dispute the assessee decided to reverse the disputed invoices, and as such the entry showing write off of the bad debts was passed by the assessee in its books of accounts. We find that as observed by the DRP, the allowability of the debts written off u/s 36(1)(vii) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the DRP had categorically conceded that allowability of the aforesaid amount as bad debt under Sec. 36(1)(vii) was not in dispute, therefore do not divulge and go any further on the said issue. 14. We further find that the assessee had claimed that the PLI of the assessee on the treatment of the bad debts as an operating expenses, would not be adversely hit, and is found to be within the arms length, thus no TP adjustment could have been made in the hands of the assessee. That as regards the observations of the DRP as to whether the writing off by the assessee of the debt recoverable from the AEs, would therein lead to any commensurate benefit on such writing off of the AEs debt as bad, we are of the considered view that characterizing of the writing off of the debt by the assessee as an operating expense by the DRP, would in no way adversely affect the operating margin of the assessee, as the PLI of the assessee, as claimed by the Ld. A.R continues to remain within the parameters of +/-5% variation, as a result whereof no TP adjustment would be called for in the hands of the assessee in respect of the CoEE segment to which such bad debts so pertain, wherein the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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