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2016 (8) TMI 1157 - AT - Income TaxTPA - ALP - determining the cost base by considering those expenses which could be directly linked with the production and distribution activity of the assessee for its AE - Held that - The assessee has not objected to the inclusion of the clearing charges foreign exchange fluctuation loss and certain indirect and direct cost of production in the cost base. The assessee has objected to the inclusion of expenses like other repair and maintenance electricity insurance and depreciation on the other assets being overhead expenses in the cost base for calculating grass markup over cost. We agree with the submissions made by the Ld. AR that while calculating the cost base over cost as per rule 10 B expenses directly related to the production and distribution of beads activity must only be considered. It is observed that the other expenses included by the Ld. TPO being electricity insurance and depreciation etc cannot be considered to be directly related to the production and distribution of the beads activity. We therefore do not find any infirmity with the findings of the Ld. CIT (A) in determining the cost base by considering those expenses which could be directly linked with the production and distribution activity of the assessee for its AE. Selection of comparable - Held that - Regarding the submissions advanced by both the parties relating to the inclusion/exclusion of the 2 comparables being Goldiam International Ltd. and Punit Commercials Ltd is it is observed that the annual report submitted by the assessee was not available on the database at the time of TP proceedings. The plea advanced by the Ld. AR is that in the event these companies are included then the correct margin as per the annual accounts must be considered. We accordingly set aside these to the Ld. TPO for verification of the data provided in the annual accounts of these 2 companies and to calculate the gross margin by using the correct figures.
Issues Involved:
1. Deletion of addition on account of provision for doubtful debts and advances. 2. Deletion of addition due to difference in the arm's length price of international transactions. 3. Reduction of the cost base of the assessee as determined by the Transfer Pricing Officer (TPO). 4. Exclusion of certain comparable companies in the transfer pricing analysis. Detailed Analysis: Issue 1: Provision for Doubtful Debts and Advances The assessee filed its return of income declaring a loss, which was processed under section 143(1) and selected for scrutiny. The Assessing Officer (AO) disallowed the provision for doubtful debts and advances amounting to ?44,52,550, citing that section 36(1)(vii) requires actual write-off in the accounts, which was not done by the assessee. The CIT (A) deleted this disallowance, relying on the Supreme Court decision in Vijay Bank vs. CIT, which held that debiting the profit and loss account and reducing the corresponding amount from debtors constitutes a write-off. The Tribunal upheld the CIT (A)'s decision, dismissing the revenue's ground on this issue. Issue 2: Arm's Length Price Adjustment The assessee, a subsidiary of an international brand, engaged in various international transactions, including job work and distribution of crystal products. The TPO adjusted the cost base by including certain overhead expenses, resulting in a higher arm's length price and an addition of ?1,50,74,722. The CIT (A) deleted these adjustments, excluding expenses like repair and maintenance, electricity, insurance, and depreciation, as they were not directly connected to the international transactions. The Tribunal agreed with the CIT (A), dismissing the revenue's grounds on this issue. Issue 3: Reduction of Cost Base The TPO had included certain overhead expenses in the cost base for the cost-plus method analysis. The CIT (A) excluded these expenses, reasoning that they were not directly related to the production and distribution activities. The Tribunal upheld the CIT (A)'s findings, agreeing that only directly related expenses should be included in the cost base. Issue 4: Exclusion of Comparable Companies The TPO excluded two companies, M/s. Punit Commercial Ltd. and M/s. Goldiam International Ltd., due to high margins and lack of data. The CIT (A) included these companies, using data available in the public domain later. The Tribunal set aside this issue to the TPO for verification of the data provided in the annual accounts of these companies and to recalculate the gross margin using correct figures. The Tribunal allowed this ground for statistical purposes. Conclusion: The Tribunal dismissed the revenue's appeal on the issues of provision for doubtful debts and advances, arm's length price adjustment, and reduction of the cost base. However, it set aside the issue of comparable companies' inclusion/exclusion to the TPO for further verification. The appeal was disposed of accordingly.
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