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2019 (3) TMI 1028 - AT - Income TaxTP adjustment - computation of the Arm s-Length Price (ALP) - MAM selection - bench-marking - CUP method VS TNMM method - business of export and import of chemicals - assessee succeeds in providing appropriate data relevant for comparison under the CUP method - HELD THAT - As relying on assessee s own case 2014 (3) TMI 885 - ITAT DELHI we hold that The CUP is the most appropriate method to be applied for the international transactions of import and export of traded goods of the assessee. The assessee is required to support the international transaction by authentic documents which may also include quoted prices - the assessee may support its international transactions benchmarking analysis by the other method u/s 92C(1)(f) of the act which is held to be retrospective by the decision of the coordinate bench. In the event assessee fails to adduce and support its transactions under CUP method or under the sixth method then ld TPO and AO are entitled to resort to other method of benchmarking and comparability analysis after granting assessee a proper opportunity of hearing. Assessee is directed to produce before ld AO/ TPO quotations which it would like to rely upon, prove them to be authentic, genuine, comparable with the terms and conditions of international transaction especially with respect to quantity and geographies and adjustment with respect to FOB value. Assessee shall also produce the benchmarking methodology before the ld AO/ TPO.AO/ TPO is directed to examine the same, and if found in accordance with law, then test the benchmarking made by assessee and compute ALP. In case AO is not satisfied with the same, before doing so ld AO/ TPO will give adequate opportunity of hearing to the assessee to prove its case, Then he may decide issue on merits in accordance with law applying any other appropriate method including TNMM. Adjustment to the international transaction of provision of business support services - comparable selection - applied the Cost plus Method taking 5% margin - HELD THAT - Merely based on some judicial precedents in case of some other assesses, comparables can neither be included nor excluded. It will lead to strange situations, where one comparable excluded in one case, would always be excluded universally in all other cases. Approach of decided on inclusion or exclusion of comparables based on judicial precedents, on one day will leave assessee as well as revenue with zero comparables. One day this approach will make the comparability analysis redundant and unworkable. Therefore, paramount is Functions performed by assessee to be compared with that of comparables for comparability analysis. It is apparent that without first analyzing the functions performed by the assessee for this business segment, the assessee has compared the margins/profit level indicator of those comparables with the assessee s own PLI. This is not acceptable as it amounts to putting the cart before the horse. In view of this, we set aside the whole issue back to the file of the learned Transfer Pricing Officer to first capture the functions performed by the assessee for this business segment supported with the relevant evidences such as agreements, bills, invoices, correspondences etc of such functions performed, and carry out fresh search of the comparable as per filters adopted by the learned Transfer Pricing Officer and compare the Profit Level Indicator of such comparable with the assessee s profit level indicator and show that IA are at arm s length. Disallowance on account of provision for doubtful debts - AO was of the view that the above provision is not an ascertained liability and therefore the same was added to the total income of the assessee as disallowance - HELD THAT - The complete details of such bad debts are provided wherein the details concerning 130 parties were mentioned. There are many credits which have been written back and there are many debits which have been written off , net sum of the above transaction is debited to the profit and loss account as bad debts of INR 9359406/-. Naturally, the above debit has been made to the profit and loss account. Therefore, they are written off in the books of accounts. Those details were already available before the assessing officer during the assessment proceedings. However, the learned AO did not care to verify them Even despite the specific direction of the learned Dispute Resolution Panel, the learned Assessing Officer did not look into the details submitted by the assessee. It was also not known to us whether the Assessing Officer has issued any letter to the assessee to explain the above claim. In view of this, we direct the learned Assessing Officer to examine the details submitted and test it on the grounds of allowability of bad debts according to Section 36 (2) Computation of amount of set off of brought forward losses and unabsorbed depreciation of earlier years - HELD THAT - We direct the assessee to produce the correct details of the amount of unabsorbed depreciation and amount of brought forward losses to be set off against the income with proper evidences which may be verified by the learned assessing officer and if found correct, the assessee should be granted the benefit of the same
Issues Involved:
1. Rejection of the Comparable Uncontrolled Price (CUP) method for Arm’s-Length Price (ALP) determination. 2. Adjustment of international transactions in the provision of business support services. 3. Disallowance of provision for doubtful debts. 4. Incorrect computation of set-off of brought forward losses and unabsorbed depreciation. 5. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act. Comprehensive, Issue-Wise Detailed Analysis: 1. Rejection of the Comparable Uncontrolled Price (CUP) Method: The primary dispute was the rejection of the CUP method by the Transfer Pricing Officer (TPO) for determining the ALP of international transactions related to the export and import of chemicals. The TPO applied the Transactional Net Margin Method (TNMM) instead. The assessee argued that the CUP method, supported by price publications and internal comparables, was appropriate. The Tribunal noted that previous decisions in the assessee’s own case for earlier years had upheld the CUP method as the most appropriate for trading transactions. The Tribunal directed the assessee to produce authentic, genuine, and comparable quotations and benchmarking methodology for review by the TPO. If the TPO finds these satisfactory, the ALP should be determined using the CUP method; otherwise, the TPO may apply another appropriate method after giving the assessee an opportunity to be heard. 2. Adjustment of International Transactions in Business Support Services: The TPO rejected the Cost Plus Method (CPM) adopted by the assessee for benchmarking business support services, instead applying the TNMM and selecting new comparables. The assessee contested the inclusion of certain comparables, arguing they were not functionally similar. The Tribunal found the transfer pricing study report prepared by the assessee to be sketchy and lacking a detailed functional analysis. The Tribunal set aside the issue to the TPO, directing the assessee to provide a detailed functional analysis supported by relevant evidence. The TPO was instructed to carry out a fresh search for comparables and compare the Profit Level Indicator (PLI) of these comparables with the assessee’s PLI. 3. Disallowance of Provision for Doubtful Debts: The Assessing Officer (AO) disallowed a provision for doubtful debts amounting to INR 123,957,036, considering it an unascertained liability. The Dispute Resolution Panel (DRP) noted that the amount was a provision written back and not claimed as an expenditure. The actual bad debts written off were INR 9,359,406. The Tribunal directed the AO to examine the details submitted by the assessee and verify the allowability of the bad debts as per Section 36(2) of the Income Tax Act, and allow the same if found in accordance with the law. 4. Incorrect Computation of Set-Off of Brought Forward Losses and Unabsorbed Depreciation: The assessee claimed that the AO incorrectly computed the set-off of brought forward losses and unabsorbed depreciation. The Tribunal directed the assessee to provide correct details of the amount of unabsorbed depreciation and brought forward losses with proper evidence. The AO was instructed to verify these details and grant the benefit if found correct. 5. Initiation of Penalty Proceedings under Section 271(1)(c): The Tribunal found the issue of initiation of penalty proceedings under Section 271(1)(c) to be premature and dismissed this ground of appeal. Conclusion: The Tribunal allowed the appeals partly for statistical purposes, directing the AO and TPO to re-examine the issues based on detailed functional analysis, authentic documentation, and correct computation of set-offs, providing the assessee with adequate opportunities to present their case.
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