2015 (7) TMI 157 - AT - Income Tax

Transfer pricing adjustment - Selection of comparable - Held that - CIT(A) was not justified in giving any opinion about the correctness or otherwise of the TPO s order for Assessment Year 2005- 06, because that was not under appeal before him. However, be that as it may be, we have heard both the parties with regard to the method to be followed while comparing the raw-material component of the assessee as well as comparables. After considering the arguments of both the sides and facts of the case, we find force in the contention of the ld. Counsel of the assessee that the ratio of raw-material/sales would be a proper ratio to compare the consumption of raw-material by the assessee and comparable parties, because sales in the case of the assessee is, admittedly, uncontrolled transaction. Whether purchase from associated enterprises is at arms-length or not? - Held that - Admittedly, sales by the assessee is not to the associated parties and therefore, is un-controlled transaction. In view of above, in the light of OECD guidelines, while working out ratio of raw-material should be worked out by comparing the raw-material vis- -vis sales. In this view of the matter, we uphold the finding of the TPO for the year under appeal wherein he arrived at the conclusion that the assessee should be allowed the adjustment of 18.50% because of excess consumption of raw-material. However, in our opinion, while giving the adjustment, the assessee should be allowed the adjustment of 18.50% of the sales and not of the 18.50% of the rawmaterial cost. We, therefore, direct the Assessing Officer to allow the adjustment of 18.50% of the sales while working out the operating profit and if, after the above adjustment, the operating profit of the assessee works out to more than 6.78% i.e. the average of operating profit of comparables, then no adjustment should be made. With this direction, we set aside the orders of the lower authorities and restore the matter back to the file of the Assessing Officer. Set off of part of losses against the income - Held that - The appellant is entitled to set off of the business loss pertaining to AY 1997-98 in its case against its profit of AY 2004- 05 in view of provisions of section 79 of the IT Act. As regards remaining losses in the case of appellant, the same cannot be denied to be carried forward by the AO u/s.79 of the Act while completing the assessment for AY 2004-05. As stated above in case if remaining losses or part of such remaining losses which are pertaining to different years of GEPCDTA and GEIIPL are claimed by the appellant against the profit of subsequent assessment years (i.e. after AY 2004-05), allowability or disallowability of such claim of losses has to be considered by the AO on merits and subject to fulfillment of conditions as laid down in section 79 and also subject to fulfillment of conditions as laid down in other relevant provisions of the IT Act while completing the assessments in the case of appellant for such subsequent assessment years. - Decided against revenue.

Issues Involved:
1. Jurisdiction of CIT(A) in enhancing income.
2. Disallowance of bad debts.
3. Transfer pricing adjustments and computation errors.
4. Set-off of business loss from previous years.

Detailed Analysis:

1. Jurisdiction of CIT(A) in Enhancing Income:
The assessee contended that the CIT(A) exceeded its jurisdiction by enhancing the income based on matters not considered by the AO or subject to appeal. The CIT(A) had disallowed a claim for bad debts, which was not a subject matter before the AO. The assessee argued that this action violated established legal principles, citing several precedents, including the Supreme Court's decisions in CIT vs. Rai Bahadur Hardutroy Motilal Chamaria and CIT vs. Shapoorji Pallonji Mistry, which restrict the CIT(A) from introducing new sources of income not considered by the AO. The CIT(A) justified the enhancement by referencing the broad powers conferred under Section 251 of the Act, supported by Supreme Court rulings in cases like CIT vs. Nirbheram Daluram. The Tribunal found that the CIT(A) should not have traveled beyond the record to enhance the income by disallowing the bad debts.

2. Disallowance of Bad Debts:
The assessee claimed a deduction for bad debts written off, which the CIT(A) disallowed, arguing non-compliance with Section 36(1)(vii) r.w.s. 36(2) of the Act. The assessee contended that the bad debts were credited to the debtor's account with a corresponding debit to the provision for bad debt account, fulfilling the statutory requirements. The Tribunal referred to the Supreme Court's decision in TRF Ltd. vs. CIT, which clarified that post-April 1, 1989, it is sufficient if the bad debt is written off in the accounts of the assessee. The Tribunal directed the AO to verify if the provision was deducted from sundry debtors and, if so, to delete the addition.

3. Transfer Pricing Adjustments and Computation Errors:
The CIT(A) enhanced the transfer pricing adjustment for the assessee's Power Control Domestic Tariff Area (PCDTA) division. The assessee argued that the CIT(A) and TPO erred in computing the raw material adjustments and the consequent operating margin. The Tribunal found that the CIT(A) adopted a correct method by considering the raw material to operating expenses ratio. However, the Tribunal agreed with the assessee that the adjustment should be based on sales rather than operating costs, as sales represent an uncontrolled transaction. The Tribunal directed the AO to allow an adjustment of 18.50% of sales while recalculating the operating profit.

4. Set-off of Business Loss from Previous Years:
The Revenue challenged the CIT(A)'s decision to allow the set-off of business losses from AY 1997-98 against the profit of AY 2004-05. The CIT(A) found that the assessee met the conditions under Section 79 of the Act, as the shareholding pattern did not change significantly. The Tribunal upheld the CIT(A)'s decision, noting that the AO's contradictory stance in different assessment years weakened the Revenue's case.

Conclusion:
The Tribunal allowed the assessee's appeal partly for statistical purposes, directing a verification of the bad debt write-off and recalculating the transfer pricing adjustment based on sales. The Revenue's appeal was dismissed, upholding the CIT(A)'s decision on the set-off of business losses.

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