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2022 (6) TMI 1363 - AT - Income TaxTP Adjustment - referring the case to the transfer pricing officer to determine the arm s length margin - AR S international transaction of guarantee between assessee and its AE, does not fall under the transfer pricing risk parameter and therefore the reference to the TPO was bad in law - HELD THAT - The case of assessee satisfies the requirement as stipulated therefore no fault can be found with the Ld.AO in referring the case to the transfer pricing officer to determine the arm s length margin, as observed by the DRP while adjudicating the issue of the DRP direction. From the record it is evident that the assessee's case was selected for scrutiny for issues which also involve large international transaction (Form 3 CEB) which fall under the transfer pricing risk parameters. Thus, it is simply clear that the case was selected for scrutiny on transfer pricing risk parameters as well as non transfer pricing risk parameters. By no stretch of imagination, it can be said that the case was selected for scrutiny on non transfer pricing risk parameters only. Once it was evident that assessee's case was selected for scrutiny on the transfer pricing risk parameter, same fell under para 3.2 of circular dated 10-3-2016 which required reference to the TPO by the Assessing Officer mandatorily. There is no exception in this regard. Disallowance u/s. 40(a)(ia) - Scope of amendment inserted by Finance Act No. 2 to section 40(a)(ia) - HELD THAT - In the present facts of the case, there is no dispute that assessee did not receive the invoice in respect of the total payment that was payable to its parent company. However, in the computation of income, assessee disallowed 30% of the provision which is in consonance with the amendment inserted by Finance Act No. 2 to section 40(a)(ia) w.e.f. 01.04.2015. We note that various benches of this Tribunal has held that this amendment is curative in nature and disallowance u/s. 40(a)(ia) of the Act is to be restricted to 30% as against 100%. The assessment years under consideration is 2016-17 and therefore the disallowance made by the assessee suo moto is in accordance with the provisions that are applicable at the relevant period of time. Addition of provision for bad and doubtful debts to the income computed under normal provisions of the Act and the book profits computed u/s. 115JB - HELD THAT - It is a claim of the assessee that the effect of bad debts written off has been taken into consideration in the books of account whereas revenue contends that assessee did not credit the amount in relation to bad debts in the profit and loss account in any of the years preceding to the year under consideration. We are of the view that the issue needs verification by the Ld.AO of the books of account and the financial statements. The Ld.AO is directed to verify the amount of provision for doubtful debts in the books of account and the book profit as be computed as per explanation 1 to section 115JB of the Act. Disallowance of interest expenditure claimed u/s. 57(iii) - assessee received external commission borrowing loan from its parent company for setting up a new manufacturing facility - Same was kept in short term fixed deposit against which interest was received - HELD THAT - Adverting to the facts of the present case, the ECB that was kept as fixed deposit against which interest was earned by assessee was set off against the interest paid by assessee on the ECB loan. Admittedly, it is not the case of the revenue that the ECB loan obtained by the assessee was not for the purpose of business. In fact, the loan was taken by assessee for setting up a new manufacturing facility in Gujarat. Thus the nexus in respect of the interest earned and interest paid stands automatically established with the business of the assessee. We note that assessee has raised an alternate plea wherein a prayer is made to consider the interest expenditure u/s. 37 of the Act. We are of the considered opinion that as the interest paid by the assessee is directly connected with the business activity, assessee succeeds on this ground. We therefore allow this claim of assessee as an allowable deduction u/s. 37 of the Act.
Issues Involved:
1. Jurisdiction 2. Transfer Pricing Adjustment of Rs. 2,93,54,528/- 3. Disallowance u/s. 40(a)(i) of the Act – Rs. 10,50,445/- 4. Addition of Provision for Bad and Doubtful Debts to Income Computed under Normal Provisions and Book Profits Computed u/s. 115JB of the Act – Rs. 36,20,870/- 5. Interest Expenditure Claimed u/s. 57(iii) of the Act Detailed Analysis: 1. Jurisdiction: Grounds Raised: - The assessee contended that the case was referred to the Transfer Pricing Officer (TPO) in violation of Instruction No. 3 of 2016. - The assessee argued that the "guarantee" international transaction does not fall under Transfer Pricing Risk Parameter and that the reference to the TPO was made without proper material. - It was also argued that the Assessing Officer (AO) did not follow the required procedure and did not provide an opportunity for the assessee to be heard. Tribunal's Findings: - The Tribunal noted that the case was selected for scrutiny on transfer pricing risk parameters, which mandates a reference to the TPO under paragraph 3.2 of Instruction No. 3 of 2016. - The Tribunal found no merit in the assessee's argument that the international transaction of "guarantee" does not fall under transfer pricing risk parameters. - The Tribunal dismissed the jurisdictional grounds raised by the assessee. 2. Transfer Pricing Adjustment of Rs. 2,93,54,528/-: Grounds Raised: - The assessee challenged the adjustment made under section 92CA of the Act, particularly the allocation of employee costs between AE and non-AE transactions in the trading segment. Tribunal's Findings: - The Tribunal noted that the TPO rejected the assessee's allocation of employee costs as ad hoc and without cogent basis. - The Tribunal upheld the adjustment made by the TPO, agreeing with the DRP's observation that the allocation was not substantiated with proper evidence. 3. Disallowance u/s. 40(a)(i) of the Act – Rs. 10,50,445/-: Grounds Raised: - The assessee argued that the provision was reversed in the subsequent financial year and thus the disallowance should not be made. - The assessee also contended that the disallowance is revenue-neutral. Tribunal's Findings: - The Tribunal referred to the Karnataka High Court decision in Toyota Kirloskar Motor (P.) Ltd. vs. ITO and the Supreme Court decision in GE India Technology Centre P. Ltd. vs. CIT, which state that income does not accrue merely based on book entries. - The Tribunal allowed the ground, holding that no further disallowance was warranted as the assessee had already disallowed 30% of the provision in accordance with the applicable provisions. 4. Addition of Provision for Bad and Doubtful Debts to Income Computed under Normal Provisions and Book Profits Computed u/s. 115JB of the Act – Rs. 36,20,870/-: Grounds Raised: - The assessee claimed that the provision for bad and doubtful debts was written off and should not be added back to the income. Tribunal's Findings: - The Tribunal directed the AO to verify the books of account and financial statements to ascertain whether the provision for doubtful debts was appropriately accounted for. - The Tribunal allowed the ground, subject to verification by the AO. 5. Interest Expenditure Claimed u/s. 57(iii) of the Act: Grounds Raised: - The assessee argued that the interest expenditure incurred on ECB loans should be allowed as a deduction under section 57(iii) as it was incurred for earning interest income. Tribunal's Findings: - The Tribunal referred to the Karnataka High Court decision in Best Trading and Agencies Ltd. vs. DCIT, which established a nexus between interest earned and interest paid. - The Tribunal allowed the deduction under section 57(iii) and alternatively under section 37 of the Act, recognizing the direct connection of the interest expenditure with the business activity. Conclusion: - The Tribunal partly allowed the appeal, granting relief on the grounds of disallowance under section 40(a)(i) and interest expenditure claimed under section 57(iii), while dismissing the jurisdictional challenge and upholding the transfer pricing adjustment. The issue of provision for bad and doubtful debts was remanded for verification.
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