TMI Blog2022 (5) TMI 1524X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benchmarked international transactions separately for CP division and GIC division. The Company claimed before the Transfer Pricing Officer (TPO) that it has adopted CUP method for benchmarking CP division. However, the TPO noticed that transfer pricing study has been done under Transaction net margin method only, though it was claimed that that international transactions of CP division was bench marked under CUP method. The TPO rejected transfer pricing study of the assessee and proceeded to determine arms length price of the international transaction by aggregating transactions of both divisions cited above. The TPO selected sixteen comparables and determined arithmetical mean of Profit Level Indicator (PLI) as 25.03%. The Profit level indicator was taken as Operating profit/Total cost. The TPO allowed deduction for working capital adjustment/risk difference to the extent of 3.60%. Accordingly he determined arms length margin (OP/TC) at 21.43% and proposed adjustment of Rs. 7,11,54,249/-. It is pertinent to note that TPO had made transfer pricing adjustment at the entity level in respect of all transactions (both AEs and non- AEs). 5. The Learned DRP gave partial relief to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national transactions entered under CP division with the AE, meaning thereby, the DRP itself has accepted the claim of the assessee in AY 2010-11 that the CP division should be benchmarked separately. The Ld A.R fairly admitted that the revenue has not accepted the above said direction given by Ld DRP and it has filed appeal before the Tribunal. Be that as it may, we notice that, from A.Y. 2011-12 onwards, the TPO himself has accepted the contention of the assessee and examined ALP of international transactions entered with AEs in CP division and GIC division separately. It is the also the contention of Learned AR that the assessee is providing market analysis and consulting services under CP divisions to both AEs as well as non-AEs, while back end office support services are provided to its AE only under GIC division. This fact, in our view, supports the claim of the assessee that it is operating CP division separately. Under these set of facts, we are of the view that there is merit in the contention of the assessee that the CP division and GIC division should be benchmarked separately. 10. Since the TPO has not benchmarked the transaction in CP division separately, in our vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above said comparable companies. (A) ACCENTIA TECHNOLOGIES LTD:- The Hon ble Bombay High Court, in the case of PCIT vs. PTC Software (I) P Ltd (101 taxmann.com 117), has held this company as not a good comparable company for captive ITES provider. The relevant discussions made by the Hon ble jurisdictional Bombay High Court are extracted below:- 5.Re. Question (c): (i) The impugned order of the Tribunal has excluded M/s. Accentia Technologies Ltd., from the list of comparables to determine the ALP of the Respondent's transactions. (ii) The impugned order renders a finding of fact that the nature of activities carried out by M/s. Accentia Technologies Ltd., are different from that carried out by Respondent. M/s. Accentia Technologies Ltd., developes its own software and rendered Medical transcription services while the Respondent is providing BPO Services. Besides, the impugned order of the Tribunal held that high profit margins of M/s. Accentia Technologies Ltd., was attributable to amalgamation which took place in the previous years relevant to subject Assessment Year. Therefore, not comparable. (iii) In fact, this Court in Pr. CIT v. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered as high end, by the coordinate bench of the Tribunal in the case of Hyundai Motors India Engg. (supra) in earlier year. Therefore, we are of the opinion that this company cannot be selected as a comparable. We accordingly direct the Assessing Officer/TPO to exclude this company. (C) CORAL HUB LIMITED:- The Hon ble Bombay High Court, in the case of PCIT vs. PTC Software (I) P Ltd (101 taxmann.com 117), has held this company as not a good comparable company for captive ITES provider. The relevant discussions made by the Hon ble jurisdictional Bombay High Court are extracted below:- 4.Re. Question (c): (I) Vishal Information Technology Ltd., (now known as Coral Hubs Ltd.: (i) The impugned order of the Tribunal held that it is to be excluded from the list of comparables to determine the ALP of the Respondent. This, by following its order dated 30th April, 2014 in the Respondent-Assessee's own case for the Assessment Years 2006-07 and 2007-08. It was so held as functionally Vishal Information Technologies Ltd., outsources the services to be rendered by it to third party - vendors while the Respondent itself rendered services to its Associated Ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns. (iii) Although both are providing ITES services, by virtue of that alone, both units will not become comparable as observed by this Court in Aptara Technology (P.) Ltd.'s case (supra) rendered on 26th March, 2018 - as follows:- 'merely because the tested party and the comparable provide ITES, they do not become comparable. The content of the services rendered by virtue of IT is to be examined before holding it to be comparable.' (iv) Further, our attention is invited to the decision of the Delhi High Court in Rampgreen Solutions (P.) Ltd. v. CIT [2015] 60 taxmann.com 355/234 Taxman 573/377 ITR 533 wherein Delhi High Court held that KPO services could not be compared to call centre services, although both would fall under the umbrella of ITES. Therefore, the functions of two cannot be considered to be similar for the purpose of being comparable. (v) In the above view, this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easons viz to enable an assessee to avail deductions in respect of certain activities. The sections do not contemplate or even remotely indicate that the activities referred to therein are comparable to each other. Much less do these provisions indicate that the activities included therein have any relevance to the transfer pricing mechanism for the purpose of determination of the ALP of international transactions. 26. The Tribunal rightly rejected this case from the list of comparables. 15. Following the above said decisions, we hold that all the above said 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. 16. It is pertinent to mention here that though the assessee has raised many grounds in respect of comparable companies, learned AR restricted his arguments on exclusion of above said five companies only. Accordingly, all other grounds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the assessee may be provided with an opportunity to explain its case before the Assessing Officer and furnish the details. Accordingly, in the interest of natural justice, 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. 21. The last issue contested by the assessee relates to rejection of claim for bad debts written off by the assessee. The Learned AR submitted that the assessee had created provision for bad debts to the extent of Rs. 14,96,261/- in A.Y. 2008-09 and had voluntarily disallowed the same while computing total income of that year. During the year under consideration the assessee wrote off a sum of Rs. 8,74,282/- as bad debts and debited the same to the Provisions for bad debts account. The Ld A.R submitted that the amount so written off is allowable as deduction, even though the same was not debited to the profit and loss account and hence the assessee should have claimed the same as deduction u/s 36(1)(vii) of the Act while computing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e following direction:- ..However considering the series of ITAT decisions on this issue, the TPO is directed to benchmark the profitability at entity level and work out the ALP adjustment at the transaction level and not at entity level as worked out in the order. 25. We heard the parties on this issue and perused the record. We notice that the direction so given by Ld DRP gets support from the decision rendered Pune bench of Tribunal in the case of Ognibene India (P) Ltd vs. DCIT (2019)(111 taxmann.com 380)(Pune) and the relevant observations are extracted below:- 19. The solitary issue raised in the above grounds relates to the manner of quantification of adjustments i.e. restricting to the value of international transactions only and not to the all transactions at the entity level. 20. At the outset, ld. AR for the assessee brought our attention to the decision of this Tribunal in the case of Hyundai Construction Equipment India (P.) Ltd. v. Dy. CIT [2019] 106 taxmann.com 197 (Pune - Trib.) and relied on the contents of para 25 to 28 of the said order of the Tribunal. In the said decision, the Tribunal granted relief to the assessee relying on the Jurisdic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l transaction alone and not entire turnover of the assessee. In this case, the Revenue was aggrieved against the order of the Tribunal and the same was agitated before the Hon'ble High Court vide Question of Law 2(a) of the appeal and in para 3 of the said question of law was not entertained as substantial question of law. For the sake of completeness, the said para 3 is extracted hereunder : 3. As far as Question (a) is concerned, the learned Counsel for the Revenue is unable to show how it arises from the impugned order of the Tribunal. It appears that the question itself is academic. In the above view, there is no occasion to entertain Question (a) as substantial question of law. 27. The said judgement of the Hon'ble High Court has become final by virtue of the Hon'ble Supreme Court judgment in the same case vide SLP(C)CC No.22512/2015 dated 05.01.2016. In fact, the Co-ordinate Bench of the Tribunal has also taken similar view in the case of Demag Cranes Components (India) Pvt. Ltd. v. DCIT vide ITA No.120/PN/2011 order dated 04.01.2012. The issue of manner of computation of adjustments restricting to the international transactions with AEs was discus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... base'. They read as follows: (i) The net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) The net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; 47. From the above, it is vivid that in TNMM, the net profit margin realized by the tested party, an assessee, out of the international transaction is computed in relation to sale effected (as in assessee' case), which is the relevant base. The expression 'in relation to' means 'in connection with' and it implies connection between impugned international transactions worth Rs. 60,218,878/- on account of Import of raw materials, components and spares for assembly/manufacture of material handling products' and to the related sales and not to the entire sales of the manufacturing segment of the assessee. The said relationship/ratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circuit boards, only 45.51 per cent of the total raw materials were imported through assessee's associated concerns, and , therefore, any adjustment, if any called for, can only be made to the 45.51 per cent of the total turnover, and not to the total turnover of the assessee. After considering the facts of the case, we do not find any difficulty in accepting this contention of the assessee that at best only 45.51 per cent of the operating profit can be attributed to imported raw material acquired from assessee's associate concerns. In the present case, the AO has calculated the operating profit on the entire sales of the assessee, which in our considered opinion, is not justified, when it is admitted position that only 45.51 per cent of raw material has been acquired by the assessee from its associate concerns for the purpose of manufacturing items. The assessee has stated that the operating profit if applied to 45.51 per cent of the turnover would come to Rs. 35,52,573 as against operating profit of Rs. 24,35,175 booked by the assessee, and the difference thereof would only be called for to be made as addition to the profit shown by the assessee. We, therefore, direct the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideally considering the relatable sales drawing the quantitative relationship to the imports from the AEs, i.e. controlled cost. The principle of proportionality is relevant here and it is a settled law in this regard. In the situation like the one in the instant case of the assessee, there is data relating to controlled and uncontrolled cost particulars. This undisputed data is suffice to arrive the proportionate sales relatable to the international transaction with the AEs i.e. controlled cost. Accordingly, the grounds 10 relating to Incorrect computation of transfer pricing adjustment to the manufacturing activity is allowed pro tanto. 28. Considering the above settled legal proposition on the issue, we are of the opinion that the said issue raised in the additional ground has to be decided in favour of the assessee. Consequently, we direct the Assessing Officer to restrict the adjustments, if any only to the international transaction with AEs. Accordingly, additional ground is adjudicated in favour of the assessee. Accordingly, the additional ground is allowed. 23. Considering the above settled nature of the issue, we are of the opinion that the order of the CIT( ..... 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