2018 (4) TMI 1599 - AT - Income Tax

Addition of bad and doubtful debts - TPA - actual sales were accounted for in earlier years and debts were created in earlier years and the provision is made when it is seen that the recovery of such debt is doubtful - Held that - In the present case the issue in dispute is regarding provision for bad and doubtful debts made in the present year. This is not the case of the assessee that sale were accounted for in earlier year on estimate basis and now the exact amount of sales is known and therefore the excess amount of debts created in earlier year on estimate basis is to be reduced now to make at par with actual debt. In the present case actual sales were accounted for in earlier years and debts were created in earlier years on the basis of actual sales and invoices and now the provision is made when it is seen that the recovery of such debt is doubtful. The whole purpose of TP study and TP exercise is to compare the price charged by the assessee for its income or prices paid by the assessee for its expenses from or to its AE and for that purpose we use various methods including TNMM as per which the profits of tested party and uncontrolled comparables are compared to come to conclusion that prices are at arms length or not. If the provision for doubtful debts is reduced from profit the numerator is reduced but the denominator is not reduced because the turnover has been considered in earlier year and cannot be considered in the present year. Hence such provision for doubtful debts has to be ignored and added back in the profit of the tested party or of the comparable as the case may be while making the TP analysis. Hence on this issue we find no reason to interfere in the order of AO and DRP. Exclusion of comparable - selection criteria - Held that - Set aside the order of AO/TPO/DRP on this aspect i.e. the final list of comparables and the matter is restored back to the file of AO/TPO for fresh decision with the direction that the AO/TPO should examine and decide afresh this aspect i.e. list of final comparables by deciding the functionality aspect as well as turnover filter aspect and while doing so this judgment of Hon ble Delhi High Court rendered in the case of Chryscapital Investment Advisors (India) (P.)Ltd. Vs. DCIT 2015 (4) TMI 949 - DELHI HIGH COURT should also be considered

Issues Involved:
1. Transfer pricing adjustment of INR 73,919,904.
2. Rejection of transfer pricing documentation.
3. Use of multiple year data.
4. Computation of operating profit margins of comparable companies.
5. Selection and rejection of comparable companies.
6. Use of information gathered under Section 133(6) of the Act.
7. Comparability adjustments.
8. Other transfer pricing related grounds.

Detailed Analysis:

1. Transfer Pricing Adjustment of INR 73,919,904:
The assessee contested the adjustment of INR 73,919,904 made by the AO/TPO, arguing that the international transactions with its associated enterprises were at arm's length. However, this ground was not pressed by the assessee during the hearing and hence was rejected.

2. Rejection of Transfer Pricing Documentation:
The assessee argued that the TP documentation prepared was as per the relevant provisions of the Act and Rules. The DRP and AO/TPO rejected this documentation, considering the information or data used as "unreliable or incorrect." This ground was also not pressed by the assessee and hence was rejected.

3. Use of Multiple Year Data:
The assessee contended that the use of multiple year data was necessary as past data influenced the determination of arm's length price. The DRP and AO/TPO rejected this approach, ignoring Rule 10B(4) and judicial pronouncements advocating for multiple year data usage. This ground was not pressed and hence was rejected.

4. Computation of Operating Profit Margins of Comparable Companies:
The assessee argued that the provision for doubtful debts should be considered operating in nature while computing the operating profit margins of comparable companies. The Tribunal examined the applicability of previous Tribunal orders, particularly in the cases of Sony India (P.) Ltd. and Kenexa Technologies Pvt. Ltd. It was concluded that the provision for doubtful debts should not be reduced from the profit for TP analysis as it does not affect the turnover. The Tribunal found no reason to interfere with the AO and DRP's order and rejected this ground.

5. Selection and Rejection of Comparable Companies:
The assessee requested the exclusion of certain companies (Persistent Systems Ltd., Larsen & Toubro Infotech Ltd., Tech Mahindra Limited, and CG-VAK Software & Exports Limited) and the inclusion of others (R Systems International Ltd., Evoke Technologies Ltd., and Spry Resources India Pvt. Ltd.). The Tribunal noted the need to apply the turnover filter and functional comparability. Referring to the Delhi High Court judgment in Chryscapital Investment Advisors (India) (P.) Ltd. vs. DCIT, the Tribunal remanded the matter back to the AO/TPO for fresh decision on the final list of comparables, considering both functionality and turnover filter aspects. This ground was allowed for statistical purposes.

6. Use of Information Gathered Under Section 133(6) of the Act:
The assessee argued that the information gathered under Section 133(6) was inappropriate for disturbing the TP documentation. The DRP and AO/TPO relied on information not available in the public domain. This ground was not pressed and hence was rejected.

7. Comparability Adjustments:
The assessee sought risk adjustments, arguing that it operated at lower risk levels compared to comparable companies. The DRP and AO/TPO disregarded judicial precedents on this aspect. This ground was not pressed and hence was rejected.

8. Other Transfer Pricing Related Grounds:
The assessee raised several other grounds related to the application of the arm's length principle and the process followed by the AO/TPO. These included observations based on incorrect interpretations of law and facts, failure to follow Section 92C(3) for rejecting TP analysis, and issues related to penalty proceedings under Section 271(1)(c) and interest computation under Section 234B. These grounds were not pressed and hence were rejected.

Conclusion:
The appeal filed by the assessee was partly allowed for statistical purposes, specifically regarding the selection and rejection of comparable companies. The Tribunal remanded this issue back to the AO/TPO for fresh decision, considering both functionality and turnover filter aspects and the judgment of the Delhi High Court in Chryscapital Investment Advisors (India) (P.) Ltd. vs. DCIT. All other grounds were rejected as not pressed.

← Previous Next →