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2017 (5) TMI 1738 - AT - Income TaxTP Adjustment - benchmarking the Direct Sales Compensation ( DSC ) - commission @ 2% for the indenting services received by the assessee from its AEs - HELD THAT - Aassessee while arriving at the average commission rate of 3.62% in respect of the aforesaid two concerns viz. M/s Sumitomo Corporation India Pvt. Ltd. and M/s Bayer Material Science Pvt. Ltd. for the year under consideration viz. A.Y. 2008-09 had in respect of M/s Bayer Material Science Pvt. Ltd. 2011 (12) TMI 393 - ITAT MUMBAI adopted the commission rate of 5% that was upheld by the Tribunal in the assesses own case for A.Y. 2006-07 and A.Y. 2007-08 as there was no transfer pricing adjustment in the hands of the said concern during the year under consideration. We have given a thoughtful consideration to the aforesaid facts and are of the considered view that the contention of the assessee in the light of the order passed by the Tribunal in its own case for the preceding years therein warrants acceptance. We thus in the light of our aforesaid observations direct the A.O. to adopt 3.62% as the appropriate rate for benchmarking the Direct Sales Compensation ( DSC ) received by the assessee from its AEs. The Ground of appeal No. 1 to 1.3 raised by the assessee before us are thus allowed. Addition @10% of the expenses incurred on Global Work Space Solutions/Facilities Management - HELD THAT - Now when the assessee had substantiated its claim towards the expenses on the basis of material made available on the record then the disallowance of any part of such expense on adhoc basis stood ruled out. We are further not persuaded to accept the observations of the lower authorities that the disallowance of 10% of GWS expenses were carried out in conformity with adhoc disallowance carried out by the A.O in the immediately preceding year viz. A.Y. 2007-08 which thereafter had been sustained by the Tribunal vide its order 2015 (12) TMI 1838 - ITAT MUMBAI of the assessee. We find that unlike the case of the assessee for the year under consideration the disallowance of 2.98 crores i.e @10% of the expenses was upheld by the Tribunal in A.Y. 2007-08 for the reason that the assessee had failed to substantiate its claim of expenses on the basis of supporting bills which therein justified carrying out of adhoc disallowance @ 10.21% in the hands of the assessee. We thus in light of our aforesaid observations are thus of the considered view that the half hearted approach of the A.O which can safely be held to be based on misconceived facts thus cannot be sustained. We thus direct the A.O to delete the addition/disallowance - Decided in favour of assessee. Disallowance of write off of earnest money deposit - claim of assessee as a revenue loss under Sec. 37 r.w Sec. 28 - HELD THAT - Advance by the assessee at the start of the project and thus was never taken into account by the assessee as its income during the year under consideration or in any of the previous years therefore the same did not satisfy the conditions contemplated u/s 36(1)(vii) r.w.s. 36(2) of the Act and as such could not be allowed as a bad debt in the hands of the assessee - assessee had alternatively claimed that as the said loss had been suffered by the assessee in the normal course of its business therefore the same was allowable under Sec. 37 r.w Sec. 28 of the Act . We are of the considered view that as the said claim of the assessee requires to be tested against the facts of the case therefore we restore the issue to the file of the A.O who shall verify the entitlement of the assessee towards claim of the aforesaid amount as a revenue loss under Sec. 37 r.w Sec. 28 of the Act - Issue allowed for statistical purposes. Non granting of credit of TDS - HELD THAT - If it emerges from the records that a short credit of TDS had been given to the assessee then the requisite remedial action be taken and the balance credit of the TDS be allowed in the hands of the assessee. We further direct the A.O. to verify the contention of the assessee that no refund had been received by the assessee while for a fact to the contrary had been recorded by the A.O. The A.O. is herein directed to verify the factual position in respect of both of the aforesaid contentions of the assessee and give the necessary consequential effect as per law. Disallowance of bad debts - bad debts written off as part of the operating expenses of the CoEE segment which had been benchmarked by the assessee applying TNMM - HELD THAT - Characterizing of the writing off of the debt by the assessee as an operating expense by the DRP would in no way adversely affect the operating margin of the assessee as the PLI of the assessee as claimed by the Ld. A.R continues to remain within the parameters of /-5% variation as a result whereof no TP adjustment would be called for in the hands of the assessee in respect of the CoEE segment to which such bad debts so pertain wherein the benchmarking for the said segment had been carried out by adopting TNMM. We thus not being impressed by the aforesaid observations of the lower authorities are thus not persuaded to subscribe to the same and as such direct the A.O to delete the addition/disallowance so made in the hands of the assessee.
Issues Involved:
1. Transfer Pricing Adjustment for Direct Sales Compensation (DSC) 2. Disallowance of Expenditure on Facilities Management 3. Disallowance of Write-off of Earnest Money Deposit 4. Short Credit of Tax Deducted at Source (TDS) 5. Non-Issuance of Refund 6. Charging of Interest under Section 234D 7. Calculation of Interest under Section 244A 8. Disallowance of Bad Debts Written Off Detailed Analysis: 1. Transfer Pricing Adjustment for Direct Sales Compensation (DSC): The assessee challenged the addition of ?7,70,87,718 on account of TP adjustment for DSC, which was confirmed by the AO under the directions of the DRP. The AO rejected the assessee’s methodology for benchmarking the international transaction and applied the Profit Split Method (PSM) instead, using an ad-hoc profit split ratio of 50:50. The Tribunal, referencing its earlier decisions in the assessee's own case, directed the AO to adopt a commission rate of 3.62% for benchmarking the DSC, as opposed to the higher rate determined by the AO and DRP. 2. Disallowance of Expenditure on Facilities Management: The AO disallowed 10% of the expenses incurred on Facilities Management, amounting to ?6,28,43,080, due to the assessee's failure to substantiate the expenses with supporting bills. The Tribunal, however, noted that the assessee had provided substantial documentation, including party-wise details of purchases and labor expenses exceeding ?10 lakh, which covered about 89% of the total expenses. Consequently, the Tribunal directed the AO to delete the ad-hoc disallowance. 3. Disallowance of Write-off of Earnest Money Deposit: The AO disallowed the write-off of ?4,00,000 as a revenue loss. The Tribunal observed that the amount was given as an advance and not taken into account as income in any previous years, thus not satisfying the conditions under Section 36(1)(vii) r.w.s. 36(2) of the Act. However, the Tribunal remanded the issue back to the AO to verify if the loss could be allowed under Section 37 r.w. Section 28 of the Act. 4. Short Credit of Tax Deducted at Source (TDS): The assessee claimed that the AO granted TDS credit of ?4,24,81,616 only, against the claimed ?4,73,63,440, resulting in a short credit of ?48,81,824. The Tribunal directed the AO to verify the records and allow the balance credit if due. 5. Non-Issuance of Refund: The assessee contended that the AO erroneously stated that a refund of ?4,58,80,144 had been issued, which was not received. The Tribunal directed the AO to verify the factual position and take necessary action. 6. Charging of Interest under Section 234D: The AO charged interest under Section 234D amounting to ?51,38,009. The Tribunal remanded the issue back to the AO for re-computation of interest. 7. Calculation of Interest under Section 244A: The AO granted interest under Section 244A of ?8,96,857. The Tribunal directed the AO to re-compute the interest under Section 244A. 8. Disallowance of Bad Debts Written Off: For A.Y. 2009-10, the AO disallowed bad debts of ?1,26,36,953 written off by the assessee. The Tribunal noted that the allowability under Section 36(1)(vii) was not in dispute, but the issue was whether it was an international transaction and if any commensurate benefit was received. The Tribunal directed the AO to delete the disallowance, as the PLI of the assessee, considering the bad debts as operating expenses, remained within the arm's length range. Conclusion: The appeals for both A.Y. 2008-09 and A.Y. 2009-10 were partly allowed, with the Tribunal directing the AO to make specific adjustments and re-computations based on the detailed observations and directions provided.
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