2018 (2) TMI 1525 - AT - Income Tax

Disallowing the claim of advance written off as shown under head sundry debts written off - Held that - The assessee-company has initially stated that the amount in question represented debts have become bad during the year and were written off in the books of account. However it was clarified before DRP that it was a wrong submission made by the assessee-company because the amount in fact a debit balance was appearing in the accounts of the Vendors which were written off as were not recoverable. The assessee-company claimed that it is a business loss. The assessee-company however has not provided any basic details as to when the amount in question was advanced and to whom and for what purpose and what steps have been taken by the assessee-company for recovery of these amounts. Since the assessee-company failed to substantiate the issue of incurring of losses in the ordinary course of business before the authorities below and no further evidence or details have been furnished before Tribunal as well we are of the view that assessee-company has failed to prove if any actual business losses have been suffered by assessee-company. Stock written-off - Held that - The assessee-company did not file any evidence in support of its claim except filing copy of the ledger account. Assessee-company did not submit any report of Engineer or Production Head to verify that actually the inventory has become obsolete. Mere filing of the ledger account is not sufficient to support the claim of the assessee-company that the stock has become obsolete. Merely referring to Accounting Standard would not support the claim of the assessee-company that in fact the stock of the assessee-company has become obsolete. In the absence of any evidence in support of the claim of the assessee-company no interference is called for in the matter. The DRP has given one more chance to the assessee-company to get the claim verified before A.O. However the assessee-company did not avail the opportunity and did not produce any relevant or cogent evidence before A.O. to substantiate the claim of obsolete stock. Excess depreciation claim on fixed assets acquired by the appellant from NCR Corporation India Private Limited - Held that - Direct the A.O. to verify the claim of the assessee-company as per law and pass consequential order.

Issues Involved:
1. Transfer Pricing Grounds
2. Corporate Tax Grounds
3. Disallowance of Advance Written Off
4. Disallowance of Stock Written Off
5. Disallowance of Excess Depreciation Claim

Detailed Analysis:

1. Transfer Pricing Grounds:
- Rejection of Economic Analysis: The DRP/TPO/AO erred in rejecting the economic analysis undertaken by the appellant and conducted a fresh economic analysis for the impugned transactions.
- Interest on Credit Period: The DRP/TPO/AO erred by identifying outstanding receivables as a separate international transaction and re-characterizing them as loans to Associated Entities (AEs). They applied the Comparable Uncontrolled Price (CUP) method without providing comparable transactions and applied an interest rate of LIBOR plus 400 basis points.
- Working Capital Adjustment: The appellant argued that account receivables arising from international transactions should be benchmarked using a combined transaction approach with a working capital adjustment.
- Previous Judgments: The DRP/TPO/AO disregarded the ITAT's order in the appellant’s own case for A.Y. 2012-2013 and the order in Kusum Health Care Private Limited by the Delhi High Court, which stated that a separate adjustment for interest on outstanding receivables should not be made if the working capital adjustment is undertaken.

Judgment: The ITAT followed the judgment in the appellant's own case for A.Y. 2012-2013 and the Delhi High Court's order in Kusum Health Care Pvt. Ltd., deciding in favor of the appellant. The orders of the authorities below were set aside, and the entire addition was deleted. Ground Nos. 3 to 6 were allowed.

2. Corporate Tax Grounds:
- Advance Written Off: The appellant claimed a deduction for an advance written off amounting to ?39,25,000, which was initially stated as bad debts but later clarified as a debit balance in vendor accounts written off as not recoverable. The DRP/AO disallowed the claim due to a lack of basic details and evidence.

Judgment: The ITAT upheld the disallowance as the appellant failed to provide sufficient evidence to substantiate the claim. Ground No. 7 was dismissed.

3. Disallowance of Stock Written Off:
- Obsolete Spare Parts: The appellant claimed a deduction for obsolete spare parts written off amounting to ?15,71,561. The DRP/AO disallowed the claim due to a lack of evidence such as reports from engineers or production heads to substantiate the obsolescence.

Judgment: The ITAT upheld the disallowance due to insufficient evidence provided by the appellant. Ground No. 8 was dismissed.

4. Alternative Claim:
- Cost Plus Method: The appellant made an alternative submission that if the cost is disallowed, it would increase the profit, and the same should be considered while determining the Profit Level Indicator (PLI).

Judgment: The ITAT rejected the alternative claim as it was not arising out of the orders of the authorities below and had no connection with the Transfer Pricing issue. The alternative claim was dismissed.

5. Disallowance of Excess Depreciation Claim:
- Fixed Assets from NCR Corporation: The appellant claimed excess depreciation on fixed assets acquired from NCR Corporation. The DRP/AO disallowed the claim, following the decisions in earlier assessment years.

Judgment: The ITAT followed its order for A.Y. 2012-2013, remanding the matter back to the AO to verify the claim as per law. Ground No. 9 was allowed for statistical purposes.

Conclusion: The appeal was partly allowed with the ITAT ruling in favor of the appellant on the Transfer Pricing Grounds and remanding the issue of excess depreciation claim for verification, while upholding the disallowances on advance written off and stock written off.

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