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2015 (11) TMI 118 - AT - Income TaxTransfer pricing adjustment - transfer pricing adjustment - international transaction of both the export of finished goods and import of finished goods for re-sale - TNM Method v/s RPM method - whether no merit in deviating from the TNM Method applied by the assessee to benchmark its international transactions with its associate enterprises on aggregate basis? - Held that - The assessee has time and again explained the reasons why it had adopted the TNMM method and had also explained the difference between the exports made to the associate enterprises and non-associate enterprises and also sales made in the domestic market. The assessee has also explained the functional risks which are different for both the segments and consequently, no comparison could be made on the gross profit level, as adopted by the TPO for benchmarking international transactions of the assessee with its associate enterprises. The explanations of the assessee have been rejected by the TPO/CIT(A) without any basis, wherein similar explanation has been accepted by the TPO itself in all the other years. The conduct of the business and the products manufactured are identical in the year under consideration, when compared to the other years i.e. assessment years 2006-07, 2007-08 and 2008-09. In the entirety of the above said facts and circumstances, we are of the view that the adoption of TNMM method was the most appropriate method for benchmarking international transactions with its associate enterprises and we find no merit in the order of Assessing Officer in adopting RPM / CPM method to benchmark the international transactions with its associate enterprises. We hold that the TNMM method should be applied on aggregate basis for benchmarking international transactions of the assessee. Thus we hold that for benchmarking international transactions with its associate enterprises on aggregate basis, TNMM method should be applied and since the margins declared by the assessee are higher than the margins declared by the comparables picked up by the assessee in its TP study report and consequently, the international transactions entered into by the assessee with its associate enterprises being at arm s length price, no addition is warranted in the hands of the assessee - Decided in favour of assessee. Set off of brought forward unabsorbed depreciation before claiming of deduction under section 10B - Held that - The issue in the present appeal is squarely covered by the ratio laid down by the Hon ble Bombay High Court in CIT Vs. Black & Veatch Consulting Pvt. Ltd. (2012 (4) TMI 450 - BOMBAY HIGH COURT) to hold that the deduction under section 10B of the Act is to be computed in the hands of the assessee before adjusting brought forward unabsorbed losses / depreciation. - Decided in favour of assessee. Disallowance the claim of bad debts - CIT(A) allowed claim - Held that - the issue of claim of bad debts written off in the books of account in the impugned assessment year is squarely covered by the ratio laid down by the Hon ble Supreme Court in TRF Ltd. Vs. CIT (2010 (2) TMI 211 - SUPREME COURT) and following the said ratio, we uphold the order passed by the CIT(A). - Decided in favour of assessee.
Issues Involved:
1. Transfer pricing adjustment in respect of the international transaction of export of finished goods. 2. Transfer pricing adjustment in respect of the international transaction of import of finished goods for resale. 3. Set off of brought forward unabsorbed depreciation before claiming of deduction under section 10B of the Income Tax Act. 4. Disallowance of the assessee's claim of bad debts. Detailed Analysis: 1. Transfer Pricing Adjustment in Respect of Export of Finished Goods: The assessee contested the transfer pricing adjustment of Rs. 4,70,39,838 made by rejecting the Transactional Net Margin Method (TNMM) and adopting the Cost Plus Method (CPM). The TPO argued that the manufacturing function warranted CPM as the most appropriate method and noted discrepancies in the gross profit margins between sales to associated enterprises and third parties. The assessee contended that the products sold to third parties were not comparable due to differences in technical specifications and market conditions. The CIT(A) upheld the TPO's application of CPM, rejecting the assessee's arguments about the comparability of transactions and the appropriateness of TNMM. 2. Transfer Pricing Adjustment in Respect of Import of Finished Goods for Resale: The TPO made an adjustment of Rs. 14,11,280 by rejecting the TNMM and applying the Resale Price Method (RPM). The TPO observed higher gross profit margins on items imported from third parties compared to those from associated enterprises. The assessee argued that the items were not similar and that the combined transaction approach should be adopted. The CIT(A) agreed with the TPO's application of RPM, emphasizing that the transactions were functionally dissimilar and should be benchmarked separately. 3. Set Off of Brought Forward Unabsorbed Depreciation Before Claiming Deduction Under Section 10B: The Assessing Officer set off brought forward unabsorbed depreciation before allowing the deduction under section 10B, which the assessee contested. The CIT(A) upheld the AO's decision, referencing the CBDT Circular and the Supreme Court decision in Himasingka Seide Ltd. v. CIT. The assessee argued that the amended section 10B (post-01.04.2001) should be treated as a deduction rather than an exemption. The Tribunal referred to the Bombay High Court's decision in CIT v. Black & Veatch Consulting Pvt. Ltd., which supported the assessee's stance that deduction under section 10B should be computed before adjusting brought forward losses. 4. Disallowance of Bad Debts: The Revenue appealed against the CIT(A)'s decision to delete the addition made by the AO disallowing the assessee's claim of bad debts amounting to Rs. 30,63,290. The Tribunal upheld the CIT(A)'s order, referencing the Supreme Court's decision in TRF Ltd. v. CIT, which clarified that bad debts written off in the books of account are allowable as a deduction. Conclusion: The Tribunal allowed the assessee's appeal regarding the application of TNMM for benchmarking international transactions and the computation of deduction under section 10B before adjusting brought forward unabsorbed losses. The Revenue's appeal on the disallowance of bad debts was dismissed, affirming the CIT(A)'s decision. The Tribunal emphasized the need for consistency in applying transfer pricing methods across different assessment years and upheld the application of TNMM as the most appropriate method for the assessee's international transactions.
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