2018 (5) TMI 1822 - AT - Income Tax

TPA - comparable selection - rejection of Calchem Industries (India) Ltd. from the list of comparables on the ground that the assessee has only filed Balance Sheet and P & L account and has not furnished Annual Report for the Financial Year 2009-10 - Held that - Since information furnished by assessee was incomplete to carry out analysis the said company was rejected. The assessee has filed Director s report along with Balance Sheet P & L account and notes to account of Calchem Industries (India) Ltd for Financial Year 2009-10 as additional evidence. Accordingly we deem it appropriate to remit the issue back to the file of TPO/Assessing Officer for considering additional evidences filed by assessee and deciding the issue of inclusion/exclusion of the abovesaid company from the list of comparables. Thus ground raised in appeal by assessee is allowed for statistical purposes. Writing of of Bad Debts u/s. 36(1)(vii) - Unrecovered amount of sales proceeds from total sales - Ballarpur Industries Limited though used the material but did not make payment on account of inferior quality of WGCC thus the assessee decided to write off the said amount - Held that - It is a settled law that entitlement of any deduction cannot depend on the treatment accorded to such entries by assessee. The existence or the absence of entries in the books of account is not determinative of such claim. The Authorities below have taken hyper-technical and pedantic view in rejecting the assessee s claim of writing off of the amount not received from Ballarpur Industries Limited against supply of WGCC though the assessee has written off the amount by reducing sales price. The manner in which assessee has given accounting treatment to the irrecoverable sales may not be the typical desired method of book entry but it will have the same effect on financial results as is writing off of Bad Debts . Accordingly we allow assessee s claim to the extent of amount irrecoverable from Ballarpur Industries Ltd. against supply of WGCC. Disallowance with respect to reduction in sales price is difference in stock - Held that - The assessee is consistently raising bills for supply of WGCC on similar methodology and the Revenue has accepted the same in past without any objection. Taking into consideration entirety of facts we are of considered view that this issue relating to reduction of sales on account of verification of stock needs revisit to Assessing Officer for de novo consideration. We hold and direct accordingly. The assessee shall furnish necessary details before the Assessing Officer viz. the manner of valuation scope of work carried out by National Survey Engineers and other relevant details. The Assessing Officer after considering the same shall decide the issue afresh after allowing opportunity of hearing to the assessee in accordance with law. Incorrect computation of operating margin - TPO while computing operating margin has considered write back of provision for doubtful debts as non-operating in nature - DRP rejected assessee s submission by placing reliance on Safe Harbour Rules - Held that - It is an undisputed fact that Safe Harbour Rules were introduced on 18.09.2013. Safe Harbour Rules does not apply retrospectively and hence they would not have application on the assessment year under appeal. The Hon ble Delhi High Court in the case of Pr. CIT Vs. M/s. Cashedge India Pvt. Ltd 2016 (5) TMI 1348 - DELHI HIGH COURT has held that Safe Harbour Rules do not apply to the assessment year 2010-11. Whether write back of provision of doubtful debts is operating in nature? - Held that - The Co-ordinate Bench of Tribunal in the case of Haworth (India) (P) Ltd. Vs. DCIT (2017 (10) TMI 1385 - ITAT PUNE) has held that liabilities written back and bad debts recovered are part of operating income of the assessee. Thus following the decision of Co-ordinate Bench we hold that Authorities below have erred in coming to the conclusion that write back of provision for doubtful debts is non-operating in nature. Treating foreign exchange gain/loss as non-operating in nature - Held that - As has been pointed earlier Safe Harbour Rules came into existence from September 2013. They do not apply retrospectively and hence have no application in the assessment year 2010-11. In the case of Approva System Pvt. Ltd Vs. CIT(A)-IT/TP (2015 (3) TMI 151 - ITAT PUNE) the Co-ordinate Bench of Tribunal has held that foreign exchange gain/loss is part of operating income.

Summary

Issues Involved:
1. Incorrect disallowance of reduction in sales price.
2. Incorrect rejection of Calchem Industries (India) Limited as a comparable.
3. Incorrect computation of operating margin.
4. Inappropriate treatment of foreign exchange gain/loss as non-operating in nature.
5. Non-granting of benefit of variation of 5%.
6. Erroneous levy of interest under sections 234B, 234C, and 234D.
7. Erroneous levy of penalty under section 271(1)(c).

Detailed Analysis:

1. Incorrect Disallowance of Reduction in Sales Price:
The assessee claimed a reduction in sales price amounting to Rs. 4,46,94,000 due to two reasons: Rs. 3,27,90,000 for inferior quality of WGCC supplied to Ballarpur Industries Limited, and Rs. 1,19,04,000 due to discrepancies in stock quantity. The Tribunal held that the reduction due to inferior quality should be allowed as it was a commercial decision to maintain harmonious relations. However, the issue of stock discrepancy was remanded back to the Assessing Officer for fresh consideration, instructing the assessee to provide necessary details.

2. Incorrect Rejection of Calchem Industries (India) Limited as a Comparable:
The Tribunal found that the TPO/DRP had rejected Calchem Industries (India) Limited due to incomplete information. The assessee provided additional evidence, including the Director's report, Balance Sheet, and P&L account for the Financial Year 2009-10. The Tribunal remitted the issue back to the TPO/Assessing Officer for reconsideration of the additional evidence to decide on the inclusion/exclusion of Calchem Industries (India) Limited as a comparable.

3. Incorrect Computation of Operating Margin:
The TPO treated the write-back of provision for doubtful debts as non-operating income, relying on 'Safe Harbour Rules' which were not applicable for the assessment year 2010-11. The Tribunal, following precedents, held that write-back of provision for doubtful debts should be considered as operating income and reversed the findings of the authorities below.

4. Inappropriate Treatment of Foreign Exchange Gain/Loss:
The authorities treated foreign exchange gain/loss as non-operating based on 'Safe Harbour Rules'. The Tribunal noted that these rules do not apply retrospectively to the assessment year 2010-11. Citing previous Tribunal decisions, it directed the Assessing Officer to treat foreign exchange gain/loss as part of the operating income.

5. Non-Granting of Benefit of Variation of 5%:
The Tribunal directed the Assessing Officer/TPO to allow the benefit of ±5% variation from the mean arm's length price as per the provisions of Section 92C(2) of the Act.

6. Erroneous Levy of Interest Under Sections 234B, 234C, and 234D:
The Tribunal noted that the charging of interest under these sections is mandatory and consequential. Therefore, this ground of appeal was dismissed.

7. Erroneous Levy of Penalty Under Section 271(1)(c):
The Tribunal held that challenging the initiation of penalty proceedings under section 271(1)(c) during the assessment proceedings is premature. Consequently, this ground of appeal was dismissed as premature.

Conclusion:
The appeal was partly allowed. The Tribunal provided relief on the grounds of reduction in sales price due to inferior quality, incorrect computation of operating margin, inappropriate treatment of foreign exchange gain/loss, and directed reconsideration of Calchem Industries (India) Limited as a comparable. The other grounds related to interest and penalty were dismissed.