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2020 (8) TMI 12 - AT - Income TaxTP Adjustment - benchmarking the transaction of Direct Sales Compensation ( DSC ) - Whether commission of 2 % of sales made by the associated enterprises ( AE') in India charged by the Appellant was consistent with the group pricing policy and practice followed globally by other group entities, and hence, the same is at arm's length? - HELD THAT - We follow the order of the Co-ordinate Bench for the immediate previous assessment year 2009-10 and direct the AO to adopt rate of commission @ 3.93% in place of 8.61% done by him and pass consequential order after due verification. Needless to say, the AO would give reasonable opportunity of being heard to the appellant before passing the order. Bad debts written off - bad debts written-off were considered as operating expenses for the purposes of computing operating margin of the Centre of Excellence in Engineering ( COEE ) segment of the Appellant which was accepted to be at arm's length by the TPO - HELD THAT - In the instant case, the amount of bad debts written off by the appellant has been considered as a part of operating expenses for the Engineering Segment , which has been benchmarked by the appellant using TNMM method. This is evident from the documents filed before the TPO. As per the benchmarking exercise undertaken in the transfer pricing study, four comparable companies were identified who have earned an arithmetic mean operating margin of 10.24% vis- -vis operating profit margin earned by the appellant under Engineering Services Segment . TPO has accepted the operating margin of Engineering Services Segment to meet the arm s length test, after considering the impact of bad debts written off. It is found that even if bad debts are considered as non-operating in FY 2009-10, the appellant s Engineering Segment would still meet the arm s length test. Further, we find that the TPO has not applied any method while disallowing the bad debts written off and has done the same on an ad-hoc basis - we delete the adjustment made by the AO towards bad debts written off. Adjustment of royalty payment - TPO held that since Earnings Before Interest and Tax ( EBIT ) of the Project Activity segment is negative, no royalty is required to be paid by the appellant - appellant has filed before the Tribunal certificate from the management stating that the Building Efficiency segment comprises of Project Activity segment as well as Engineering Segment and the appellant has filed additional evidence vide letter dated 03.07.2019 i.e. a certificate from Chartered Accountant supporting the contentions of the appellant that Building Efficiency segment (i.e. aggregate of Project Activity segment and Engineering Segment) had a positive EBIT and accordingly royalty is paid as per the Royalty Agreement - HELD THAT - Documents filed on 11.12.2017 and 03.07.2019 are quite relevant for the purpose of deciding the issue arising before us. Therefore, we admit the above additional evidence. However, we find that in the instant case, the AO has passed the order u/s 143(3) r.w.s. 144C(13) for AY 2010-11 on 19.12.2014 and for AY 2011-12 on 30.11.2015. Therefore, we deem it fit to remit the matter to the file of the AO/TPO to pass an order after examining the above documents. Short grant of taxes deducted at source - HELD THAT - We direct the AO to grant the credit for balance TDS amounting to ₹ 4,72,467/- to the appellant, after due verification. Non-grant of credit of advance tax - HELD THAT - We direct the AO to grant the credit for advance tax paid by the appellant of ₹ 3,47,603/- for the impugned assessment year, after due verification. Set off available brought forward business loss and unabsorbed depreciation against the total income computed for the impugned assessment year, after due verification and as per the provisions of the Act.
Issues Involved:
1. Direct Sales Compensation 2. Bad Debts Written Off 3. Royalty Payment 4. Short Grant of Taxes Deducted at Source (TDS) 5. Non-Grant of Credit of Advance Tax 6. Levy of Interest under Section 234D 7. Initiation of Penalty under Section 271(1)(c) 8. Set Off of Brought Forward Business Loss and Unabsorbed Depreciation Detailed Analysis: 1. Direct Sales Compensation: The appellant contended that the commission of 2% of sales made by the associated enterprises (AEs) in India was consistent with the group pricing policy and practice followed globally, and hence, was at arm's length. The Transfer Pricing Officer (TPO) disagreed, applying the Profit Split Method (PSM) instead of the Transactional Net Margin Method (TNMM) used by the appellant. The Dispute Resolution Panel (DRP) upheld the TPO's approach, leading to an adjustment of ?7,93,37,989/-. The Tribunal, however, referred to its previous decisions in the appellant's own case for earlier years, where the Comparable Uncontrolled Price (CUP) method was deemed appropriate, confirming an arm's length rate of 3.63%. Accordingly, the Tribunal directed the AO to adopt a rate of 3.93% for the current year, partially allowing the appellant's grounds. 2. Bad Debts Written Off: The appellant wrote off bad debts amounting to ?72,97,222/- related to the engineering segment, which were disputed by the AEs. The TPO and DRP did not accept the appellant's justification, treating the ALP of the transaction as Nil. The Tribunal found that the bad debts were part of operating expenses for the engineering segment, benchmarked using TNMM, and even if considered non-operating, the segment would still meet the arm's length test. The Tribunal deleted the adjustment, allowing the appellant's grounds. 3. Royalty Payment: The appellant paid royalty of ?1,57,96,209/- to its AE at 1.5% of net sales, benchmarked using the CUP method. The TPO and DRP rejected this, citing negative EBIT in the 'Project Activity' segment and non-compliance with RBI guidelines. The Tribunal admitted additional evidence showing positive EBIT for the 'Building Efficiency' segment, which includes 'Project Activity' and 'Engineering Services'. The matter was remitted to the AO/TPO for re-examination, allowing the appellant's grounds for statistical purposes. 4. Short Grant of Taxes Deducted at Source (TDS): The appellant claimed TDS credit of ?5,12,86,407/- in its revised return, but the AO granted only ?5,08,13,940/-, resulting in a shortfall of ?4,72,467/-. The Tribunal directed the AO to grant the balance TDS credit after due verification. 5. Non-Grant of Credit of Advance Tax: The appellant claimed advance tax credit of ?3,47,503/- in its revised return, which was not granted by the AO. The Tribunal directed the AO to grant the credit for advance tax paid after due verification. 6. Levy of Interest under Section 234D: This issue was deemed consequential in nature, to be addressed based on the final assessment. 7. Initiation of Penalty under Section 271(1)(c): The penalty initiation was considered premature as it was only initiated and not finalized. 8. Set Off of Brought Forward Business Loss and Unabsorbed Depreciation: The appellant claimed set off of brought forward business loss and unabsorbed depreciation, which the AO did not allow. The Tribunal directed the AO to set off available brought forward business loss and unabsorbed depreciation against the total income for the impugned assessment year after due verification. Procedural Issue: The Tribunal acknowledged the delay in pronouncement of the order due to the COVID-19 pandemic and the resultant lockdowns, citing extensions granted by the Hon'ble Supreme Court and Bombay High Court. The exception to the 90-day time limit for pronouncement of orders was applied. Conclusion: The appeal was partly allowed, with directions for the AO to re-examine certain issues and grant appropriate reliefs after due verification.
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