2014 (11) TMI 211 - AT - Income Tax

Bad debts written off to pharma division Held that - The assessee actually wrote off which is what the assessee had claimed as a deduction against income of the discontinued business - prima facie even though sale of unit has been made on going concern basis, the debtors are transferred only on realization @ 95% since admittedly bad debts cannot exceed 5%, and, to that extent, the assessee continues to have financial exposure for realization of debtors - as there is no clear factual and legal findings about the very basic aspects of this disallowance, the matter is to be remitted back to the AO for fresh adjudication Decided in favour of assessee. Disallowance u/s 14A r.w. Rule 8D Held that - The provisions of rule 8D can only be applied prospectively and, there was no relevance so far as assessments for the assessment years prior to 2008-09 relying upon Maxopp Investments Ltd Vs CIT 2011 (11) TMI 267 - Delhi High Court - there are no direct expenses incurred in earning this dividend income, the amount is restricted by the disallowance u/s 14A to dividend income Decided partly in favor of assessee. Advertisement expenses yield any benefit to the assessee or not Held that - The TPO has accepted profitability of these transactions on the basis of TNMM and yet picked up this reimbursement, which constitutes a charge on such profitability, for rejection the expenses were incurred on behalf of the assessee, and this position remains uncontroverted - Whether the assessee was under an obligation to incur these expenses or not is, therefore, not really relevant - The question of incidental benefit to the assessee, for expenses incurred by the AE, would arise only when the expenses are incurred by the AE in its own right though for the common benefit of group as a whole thus, the order of the CIT(A) is to be set aside Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of bad debts write-off.
2. Disallowance under section 14A of the Income Tax Act, 1961.
3. Arm's length price adjustment for reimbursement of advertisement expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Bad Debts Write-off:
The primary issue revolves around the addition of Rs. 28,65,157 on account of the write-off of bad debts related to the pharmaceutical division of the appellant company. The Assessing Officer (AO) disallowed the bad debts claim on the grounds that the related business was sold, and thus, the bad debts could not be justified as a deduction. The Dispute Resolution Panel (DRP) upheld this view, noting that the bad debts did not pertain to the assessee's own business. The Tribunal found that the assessee's detailed submissions, including the agreement that bad debts would not exceed 5% of the sales consideration, were not adequately addressed by the AO or DRP. The Tribunal observed that the assessee continued to have financial exposure for the realization of debtors, even after the sale. Consequently, the Tribunal remitted the matter back to the AO for a fresh adjudication, instructing the AO to consider all the contentions of the assessee and issue a speaking order.

2. Disallowance under Section 14A of the Income Tax Act, 1961:
The second issue pertains to the disallowance of Rs. 8,17,045 under section 14A, read with rule 8D, related to exempt dividend income. The AO disallowed this amount, asserting that some part of the administrative expenditure must be attributed to earning the dividend income. The Tribunal noted that rule 8D is applicable prospectively from the assessment year 2008-09, as held by the jurisdictional High Court in Maxopp Investments Ltd Vs CIT. Since the assessment year in question was prior to 2008-09, the Tribunal held that the disallowance under rule 8D could not be sustained. However, the Tribunal restricted the disallowance to the amount of dividend income, providing partial relief to the assessee.

3. Arm's Length Price Adjustment for Reimbursement of Advertisement Expenses:
The third issue involves the addition of Rs. 44,28,721 related to the reimbursement of advertisement expenses. The Transfer Pricing Officer (TPO) rejected this transaction as not being at arm's length, arguing that the reimbursement was not under any contractual obligation and only provided incidental benefits. The Tribunal found that the TPO accepted the profitability of transactions based on the Transactional Net Margin Method (TNMM) but inconsistently rejected the reimbursement, which was a charge on profitability. The Tribunal noted that the reimbursement was a pass-through cost without any markup, incurred under instructions from the assessee. The Tribunal concluded that the arm's length price of such a reimbursement could not be zero and directed the AO to delete the adjustment.

Conclusion:
The appeal was partly allowed, with the Tribunal remitting the issue of bad debts write-off back to the AO for fresh adjudication, partially allowing the disallowance under section 14A, and directing the deletion of the arm's length price adjustment for advertisement expenses reimbursement. The judgment emphasized the necessity of a detailed and reasoned approach in addressing the assessee's contentions and the applicable legal provisions.