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2020 (11) TMI 220 - AT - Income TaxDisallowance of pre commencement expenditure u/s 35D - Revenue or Capital Expenditure - claim of the assessee that its business was to be taken to have been set up when the infrastructure was set up (i.e technical staff was appointed etc), and initially contacts were made with the prospective customers - HELD THAT - In the case before us, as the assessee company which is engaged in the business of providing software development services exclusively to its parent company, had purchased the computers and recruited the staff, it could, thus, in the backdrop of the nature of the business of the assessee, be safely concluded, that its business was though set up but was yet to commence. Accordingly, expenses which were incurred during the interregnum i.e between the setting up of the business and commencement of the same, was rightly claimed as an allowable deduction by the assessee. Accordingly we set aside the order of the CIT(A) in context of the aforesaid issue under consideration and vacate the disallowance made by the A.O while framing the assessment. TP adjustment u/s 92C - Comparable selection - A.O excluded one of the comparable company viz. M/s Cather Consultancy Services Pvt. ltd.a persistent loss making company by treating bad debts as a non-operational expenditure - HELD THAT - The writing back of bad debts being a normal incident of a business operation which is carried everywhere in accounts to have a true picture of profits of the relevant party, thus, cannot be held to be a non-operational expenditure. Accordingly, we do not find any justification for exclusion of the bad debts written off by the aforesaid comparable company in its accounts, for the purpose of computing its margins for the aforesaid three years. To sum up, the margins of the aforesaid comparable viz. M/s Cather Consultancy Services Pvt. Ltd. after excluding the bad debts as a non-operating expenditure by the assessee cannot be accepted. As the aforesaid comparable company, viz. M/s Cather Consultancy Services Pvt. Ltd. can safely be held to be a persistent loss making company for three years, therefore, the A.O had rightly excluded it from the final list of comparables for the purpose of benchmarking the international transactions of the assessee for the year under consideration. Exclusion of M/s En Pointe Technologies India Pvt. Ltd. for the reason, that it had a high profit margin of 31.18% - Admittedly, in case the assessee is able to demonstrate that the higher margin of a company was backed by certain extraordinary events, then, there would be a basis for rejecting the same as a comparable for the purpose of benchmarking the international transactions of the assessee. However, as it is not the case of the assessee that the higher margin of the aforementioned company was due to certain extraordinary circumstances prevailing in its case, therefore, we are unable to concur with the seeking of the exclusion of the said company from the final list of comparables. The Ground of appeal No. 4 is dismissed. Not making risk adjustment of 2% while computing the ALP under Sec. 92C - HELD THAT - Admittedly, the assessee being captive unit of its parent company viz. Global Conference Organizers, B.V, Netherland, therein operates in an environment which is free of risk, and resultantly, its margin of profit for the said reason is on the lower side - claim of the assessee for the risk adjustment while benchmarking its international transactions in the backdrop of the financial of the comparables companies merits acceptance. Accordingly, we herein restore the issue to the file of the A.O, with a direction to consider the assessee s claim for risk adjustment for benchmarking its international transactions. The Ground of appeal No. 5 is allowed for statistical purposes. Adjustment u/s 92C at 13.15% of the sale turnover instead of 13.15% of cost - HELD THAT - Admittedly, the ALP of the international transactions of the assessee had been worked out by the A.O at 13.15%. In our considered view, the arm s length profit in the hands of the assessee was to be worked out on its cost and not on its sale turnover of ₹ 94,87,509/-. Accordingly we herein restore the matter to the file of the A.O, who is directed to rework out the adjustment by applying the average PLI of the comparables to the cost of the international transactions carried out by the assessee during the year under consideration, and not on its sale turnover - Ground of appeal No. 6 is allowed for statistical purpose.
Issues Involved:
1. Disallowance of pre-commencement expenditures. 2. Deduction of expenses under Section 35D. 3. Transfer Pricing (TP) adjustments and exclusion of comparable companies. 4. Risk adjustment in computing Arm’s Length Price (ALP). 5. Calculation of adjustment under Section 92C. Detailed Analysis: 1. Disallowance of Pre-commencement Expenditures: The assessee claimed expenses incurred between 20.04.2009 to 31.07.2009 as business expenses under Section 37(1) of the Income Tax Act. The A.O. disallowed these expenses, treating them as pre-commencement expenses under Section 35D. The CIT(A) upheld the disallowance but allowed 1/10th of the expenses as a deduction over 10 years. The Tribunal held that the assessee had "set up" its business by incurring expenses on salaries, rent, electricity, etc., and thus, these expenses were allowable under Section 37(1). The Tribunal vacated the disallowance of ?12,26,063/-. 2. Deduction of Expenses under Section 35D: The CIT(A) directed the A.O. to allow the pre-commencement expenses over 10 years as per Section 35D. The assessee argued that the expenses should be spread over 5 years. The Tribunal, having allowed the expenses under Section 37(1), rendered this ground infructuous. 3. Transfer Pricing Adjustments: The A.O. excluded M/s Cethar Consultancy Services Pvt. Ltd. from the list of comparables, treating it as a persistent loss-making company. The assessee contended that the company had made a profit in one of the three years. The Tribunal upheld the A.O.'s decision, agreeing that bad debts should be considered as operational expenses, making the company a persistent loss-maker. The Tribunal also dismissed the assessee's claim to exclude M/s En Pointe Technologies India Pvt. Ltd. due to its high profit margin, as no extraordinary circumstances were demonstrated. 4. Risk Adjustment in Computing ALP: The assessee claimed a 2% risk adjustment, arguing it operated in a risk-free environment as a captive unit. The A.O. rejected this claim due to lack of quantification. The Tribunal found merit in the assessee's claim and directed the A.O. to consider the risk adjustment while benchmarking the international transactions. 5. Calculation of Adjustment under Section 92C: The assessee argued that the adjustment should be calculated on the cost of ?90,48,051/- instead of the sale turnover of ?94,87,509/-. The Tribunal agreed and directed the A.O. to rework the adjustment based on the cost. Conclusion: The Tribunal allowed the appeal partly, vacating the disallowance of ?12,26,063/- under Section 37(1), and directed the A.O. to consider risk adjustment and rework the TP adjustment based on cost. Other grounds were dismissed or rendered infructuous.
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