2023 (5) TMI 943 - AT - Income Tax

TP adjustment - computation of profit level indicator (PLI) - foreign exchange loss - part of operating expenses or not - Assessee claims that Foreign exchange loss is not to be considered as operating expense while computing profit level indicator with respect to the computation of arm's-length price with respect to the sale of agricultural commodities to its associated enterprise - HELD THAT - According to the learned dispute resolution panel when the assessee entered into an agreement for sale in foreign currency, the figure of sales and forex loss/gain taken together gives the correct picture. In reality, the assessee incurs neither any loss nor any gain because of forex fluctuation it is only an accounting treatment. Assessee in reality did not incur any liability towards buyer's account on foreign exchange fluctuation. DRP also extracted the scenario provided by the assessee wherein it is proved that foreign exchange loss incurred even before the sale has been made and that is because of reinstatement/adjustment of advances received against sales. Sales and forex losses incurred by the assessee are closely interlinked for this reason. Assessee in the sale price also giving AE benefit of forex fluctuation also. No infirmity in the direction of the LD DRP by including forex loss in the PLI computation of Assessee. Ground is dismissed. Late payment of dues of employees contribution as per respective due dates of the respective Act - HELD THAT - In view of the decision of Honourable Supreme court in case of Checkmate solutions Services Limited 2022 (10) TMI 617 - SUPREME COURT this issue is to be decided against the assessee and hence Ground is dismissed. Provision of bad and doubtful debts which is not writing off actual debts - HELD THAT - As it does not fulfill the condition of allowability as bad debts and hence ld DRP has correctly upheld the order of the ld AO. We dismiss this ground also. Allowance of carry forward losses - HELD THAT - We set aside this issue to the file of the dl AO that if the necessary conditions are satisfied, the claim of such set off may be examined in accordance with the law. This ground is allowed subject to verification.

Summary

Issues Involved:
1. General Ground challenging the assessment order.
2. Transfer Pricing Adjustment for sale of agri-commodities to AEs.
3. Treatment of foreign exchange loss.
4. Rejection of assessee's search process.
5. Incorrect computation of PLIs and non-grant of foreign exchange adjustment.
6. Disallowance of provision for doubtful debt.
7. Addition for employees' contribution to PF/ESIC.
8. Non-allowance of brought forward losses.
9. Initiation of penalty proceedings.

Detailed Analysis:

1. General Ground:
The appellant challenged the assessment order as bad in law and the additions/disallowances made by the AO as illegal and untenable. The tribunal dismissed this ground as general in nature.

2. Transfer Pricing Adjustment:
The appellant contested the transfer pricing adjustment of Rs. 31,34,18,824/- for the sale of agri-commodities to associated enterprises (AEs), arguing against the application of the Transactional Net Margin Method (TNMM). The tribunal upheld the DRP's decision that TNMM was the most appropriate method but included foreign exchange loss in the Profit Level Indicator (PLI) computation, considering it intrinsically linked to sales. Thus, the tribunal found no infirmity in the DRP's direction and dismissed this ground.

3. Treatment of Foreign Exchange Loss:
The appellant argued that foreign exchange loss should not be considered an operating expense while computing PLI. The DRP held that forex losses were intrinsically linked to sales due to advances received against sales, and thus, forex loss was correctly included in the PLI computation. The tribunal upheld this view and dismissed the ground.

4. Rejection of Assessee's Search Process:
The appellant claimed that the TPO/AO erred in rejecting their search process and introducing new comparables. The tribunal dismissed this ground due to the absence of arguments before lower authorities and lack of representation.

5. Incorrect Computation of PLIs and Non-Grant of Foreign Exchange Adjustment:
The appellant argued against the incorrect computation of PLIs and the non-grant of foreign exchange adjustment. The tribunal dismissed this ground due to lack of justification and representation.

6. Disallowance of Provision for Doubtful Debt:
The appellant contested the disallowance of Rs. 6,14,77,582/- for specific provision for doubtful debt. The tribunal upheld the DRP's decision, stating that the provision did not fulfill the condition of allowability as bad debts and dismissed this ground.

7. Addition for Employees' Contribution to PF/ESIC:
The appellant argued against the addition of Rs. 1,07,214/- for late payment of employees' contribution towards PF/ESIC. The tribunal, referencing the Supreme Court decision in Checkmate Solutions Services Limited, decided against the appellant and dismissed this ground.

8. Non-Allowance of Brought Forward Losses:
The appellant contested the non-allowance of set-off for brought forward losses and unabsorbed depreciation. The tribunal set aside this issue to the AO for examination in accordance with the law, allowing this ground subject to verification.

9. Initiation of Penalty Proceedings:
The appellant challenged the initiation of penalty proceedings under section 271(1)(c) for alleged concealment of income. The tribunal dismissed this ground as premature and consequential.

Conclusion:
The tribunal partly allowed the appeal, dismissing most grounds but remanding the issue of brought forward losses to the AO for verification. Order pronounced in the open court on 03.03.2023.