2020 (3) TMI 335 - AT - Income Tax

Transfer pricing adjustment - MAM selection - TNMM or CUP - HELD THAT - DRP rejected the assessee-company's contentions without assigning reasons whatsoever. The assessee also contends that the TPO as well as DRP had not assigned any reason as to why CUP method is not most appropriate method in the nature of transactions assessee company had with its AE. It was also submitted that TPO has not considered the alternative submissions of the assessee company that in case TNMM is adopted as the most appropriate method, same should be applied based on internal comparables rather than external comparables. Now, law is quite settled that internal comparables are more preferable to external comparables. Finally, learned authorised representative of the assessee submitted that the TPO had not considered the submissions of the assessee-company for adjustment towards unutilized capacity. AO also not followed directions of the DRP while passing final assessment order. In the circumstances, it was prayed that the matter may be restored back to the file of the AG for de novo consideration. CIT(DR) had no serious objections for restoring the matter back to the file of the AO/TPO for fresh analysis of TP study. In the circumstances, we remit the matter back to the AO to consider the above submissions de novo after affording due opportunity of being heard to the assessee company. Deduction u/s 10A - HELD THAT - Ground raised by the revenue is covered against the revenue by the decision rendered by Hon ble jurisdictional Karnataka High Court in the case of Tata Elixi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT . Requirement of considering the issue of deduction of foreign expenses from both export turnover and total turnover shall arise only if the additional ground urged by the assessee is decided against the assessee, i.e., if the additional ground is decided in favour of the assessee by holding that there is no requirement of deducting foreign expenses from the export turnover, then the ground urged by the revenue shall become infructuous. AO has actually allowed deduction u/s 10B of the Act. The Ld DRP has referred to both sec.10B and 10A in its directions. The grounds urged by both the parties refer to sec.10A only. Thus, there is confusion about the section under which the deduction was claimed by the assessee. Disallowance of Provision for doubtful debts claimed by the assessee u/s 36(1)(vii) - HELD THAT -Since the impugned claim has not been examined by the AO in terms of 36(1)(vii) of the Act, we restore this issue to his file for examining the same afresh. Provision for Gratuity is an ascertained liability eligible to be deducted from the Net profit for the purpose of computing book profit u/s 115JB - HELD THAT - Provision for gratuity is an ascertained liability eligible to be deducted from net profit for the purpose of computing book profit u/s 115JB

Issues Involved:
1. Transfer pricing adjustment made by the AO.
2. Disallowance u/s 14A of the Act.
3. Disallowance of provision for doubtful debts made u/s 36(1)(vii) of the Act.
4. Interest charged u/s 234B of the Act.
5. Exclusion of foreign currency expenses from export turnover for deduction u/s 10A of the Act.
6. Relief granted by DRP in respect of Transfer Pricing Adjustments.
7. Computation of deduction u/s 10A of the Act.
8. Computation of book profit by excluding the provision for gratuity treating it as an ascertained liability.

Detailed Analysis:

1. Transfer Pricing Adjustment:
The first common issue pertains to the transfer pricing adjustment made by the TPO and partially confirmed by the DRP. The assessee argued that KMG USA, which secures contracts and outsources them to the assessee, does not retain any margin from the amounts billed to end customers. The assessee used the CUP method to benchmark the transactions, but the TPO rejected this and adopted the TNMM method, leading to an adjustment. The DRP provided some relief regarding comparables. The Tribunal noted that a similar issue was remitted back to the AO/TPO for fresh consideration in the assessee's own case for AY 2011-12. Following this precedent, the Tribunal restored the issue to the AO/TPO for de novo consideration.

2. Deduction Claimed u/s 10A of the Act:
The second common issue involves the computation of deduction u/s 10A. The DRP directed the AO to reduce foreign currency and lease line expenses from both export and total turnover. The AO had only reduced these expenses from export turnover. The Tribunal noted that the additional ground raised by the assessee, arguing that such expenses should not be deducted from export turnover as the services rendered are not technical services, needs examination. The Tribunal restored this issue to the AO for fresh examination, considering the additional ground.

3. Disallowance u/s 14A of the Act:
The assessee did not press this ground due to the smallness of the amount involved. Consequently, the Tribunal dismissed this ground as not pressed.

4. Disallowance of Provision for Doubtful Debts u/s 36(1)(vii) of the Act:
The AO disallowed the provision for doubtful debts, treating it as an unascertained liability. The assessee argued that it should be allowed as a bad debt written off under section 36(1)(vii), citing the Supreme Court decision in Vijaya Bank vs. CIT. The Tribunal restored this issue to the AO for fresh examination under section 36(1)(vii).

5. Interest Charged u/s 234B of the Act:
The Tribunal noted that the issue of interest charged u/s 234B is consequential and does not require adjudication.

6. Provision for Gratuity as Ascertained Liability:
The issue was whether the provision for gratuity is an ascertained liability deductible from net profit for computing book profit u/s 115JB. The Tribunal referred to various case laws, including Dresser Valve India P Ltd vs. ACIT, which held that provision for gratuity is an ascertained liability. Following these precedents, the Tribunal concluded that the provision for gratuity is an ascertained liability and should be deducted from net profit for computing book profit u/s 115JB.

Conclusion:
The Tribunal restored several issues to the AO/TPO for fresh consideration, dismissed the ground relating to disallowance u/s 14A as not pressed, and provided clarity on the treatment of provision for gratuity. The appeals of both the assessee and the revenue were partly allowed.

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