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TMI Blog2015 (1) TMI 922X X X X Extracts X X X X X X X X Extracts X X X X ..... s business loss as held by the Hon’ble Bombay High Court in the case of Harshad J Choksi (2012 (8) TMI 710 - BOMBAY HIGH COURT). Further, in CIT V/s Shreyas S Morakhia (2012 (3) TMI 103 - BOMBAY HIGH COURT), in the context of share broker, it was held that unrealized value of shares from the clients can be claimed as bad debts u/s 36(1)(vii) of the Act, as the brokerage from the clients is taken to the profit and loss account, therefore, the same is to be allowed as bad debts. Here in this case also, the assessee is earning services fees for rendering such services and if any such amount paid by the assessee on behalf of the parties remained unrecoverable, then the same can be allowed as bad debts. Thus, from both the angles, we do not find any reason to confirm the disallowance of 28,76,102, and accordingly, the same is deleted.- Decided in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... e claim of the appellate that ₹ 28,76,102/- should be treated as a business loss under section 28 read with section 37 of the Act and allowed as a deduction. 4. The ld. AO erred in not granting credit for taxes deducted at source amounting to ₹ 27,55,636/- and consequential levy of interest under section 234B and 234C of the Act" 3. At the outset, ld. counsel, Shri Ajit Jain submitted that ground no.4 raised by the assessee is not pressed. Accordingly, the same is treated as dismissed as not pressed. 4. The main issue involved in this appeal has been raised in ground No.2, which is Transfer pricing adjustment of ₹ 1,55,35,432/-. The brief facts of the case qua this addition are that, the assessee, M/s Federal Express (India) Pvt.Ltd (now merged with FedEx Express Transportation and Supply Chain Services India Private Limited) is a wholly owned subsidiary of Federal Express Corporation, (hereinafter referred to as FEC). The FEC has been granted approval by Director General of Civil Aviation to operate all cargo air services to and from India. It has branches in major cities in India and the operation included transportation and delivery of international priority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of custom clearance services for low value packages 5,85,42,664 TNMM Federal Express Corporation -Branch Office ('FEC BO 2. Coordination of custom o clearance services for high value packages. f 37,69,464 TNMM 3. Custom clearance fee 289,83,056 CUP 4. Co-ordination of back-up operation 89,81,719 TNMM Federal Express European Services Inc (FCC) The segmental accounts of the assessee, revealed the following details of revenue, cost and mark-up : All Amounts in Rs. Particulars custom clearance for low value (Mark-up) 14% customs clearance for high value (Jena) custom clearance advancement fee back office operation (WNS) As per P&L account Cost 5,13,53,214 34,58,224 2,06,63,940 82,40,110 8,37,15,488 Mark-up 71.89,450 3,11,240 7,41,610 82,4,2300 advancement fees 3,83,97,399 3,83,97,399 total revenue 5.85.42.664 37,69,464 5,90,61,339 89,81,719 13,03,55,186 5. On the perusal of the profit and loss account, the TPO noted that the payment made to Jeena and the custom duty were not reflected in the profit and loss account. These payments were as under :. All Amounts in Rs Particulars Low value goods High value gods Custom duty 61,43 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars custom clearance for low value (Mark-up) 14% customs clearance for high value (Jena) back office operation (WNS) custom clearance advancement fee As per P&L account Cost 5,13,53,214 34,58,224 8240110 2,06,63,940 8,37,15,488 Mark-up 71.89,450 3,11,240 7,41,610 82,4,2300 Thus, the assessee has only taken the cost of custom clearance for high value (Jeena ) at ₹ 34,58,224/- and mark up of ₹ 3,11,240/-. The TPO held that the markup of 9% should have been applied by the assessee on the entire cost of high value services as the payment to Jeena cannot be a pass through cost as stated by the assessee. 5.1 He accordingly made the transfer pricing adjustment on the total cost in accordance with the custom clearance for high value co-ordinated through Jeena in the following manner: Custom clearance for high value (Jeena Amount in Rs. cost (as per P&L A/c) 34,58,224 payment made to Jeena 17,26,15,911 total cost 17,60,74,135 Mark-up of 9% on total cost (Arm Length Price) 1,58,46,672 price charged by the assessee 3,11,240 adjustment 1,55,35,432 6. Such an adjustment has been confirmed by the DRP in their direction to the AO,, which has been dealt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der services for which it was entitled to cost + markup of 14% on lower value services and 9% in respect of high value services. Even though the assessee had entered into an agreement with Jeena for rendering high value services, the assessee was having direct control of such services and therefore, the assessee were required to show mark up of 9% on such services. Regarding the decision of the Hon'ble Delhi High Court, he submitted that the same will not be applicable to the facts and case of the assessee as the facts were quite different. Thus, he strongly relied upon reasons given in the order of TPO. 9. We have heard the rival submissions, perused the relevant findings given by TPO as well as by the DRP and also material placed on record. The assessee is mainly rendering custom clearance services of low value packages and also coordinating custom clearance services in respect of high value bound services. As per the agreement with the AE the assessee, for the low value services, was charging mark-up of 14% over the cost and for the high value services, it was entitled for mark-up 9% over the cost of value. So far as, the low value services are concerned, there is no dispute. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has beared any risks. From the records, it is evident that for co-coordinating custom clearance services on high value packages, the assessee was not rendering any direct services to the AE, but was getting such services done through third party who had the requisite license. The assessee's role was confined to making of the payments and to get the entire re-imbursements of the costs. It is the Jeena company who had charged for its services and the assessee has merely pass through such cost. In other words, assessee has merely done co-ordinating services, rather than providing full fledged services. The department's allegations that it was monitoring Jeena's activity does not per se lead to any inference that the assessee was performing these services directly. All the activities and services have been rendered by Jeena who had received the payment as per their invoice. Under such a situation, it cannot be held that mark up of 9% should be applied on such costs incurred by the Jeena for bench marking the arms length price of the assessee vis-a-vis the transactions with AE. The net profit margin realized from the AE is to be computed only with reference to the cost incurred directly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incipal (which was reimbursed by the AE), cannot to be included in the total cost for determining the profit margin and the mark up is to be applied to the cost incurred by the appellant company. The value of export by third party vendors to third party customers does not provide any substantial basis for determining the arms length price 14. Counsel further submitted that the mark up upon the entire FOB value of the AE would artificially enhance the LFILs cost base for applying the OP/TC margin. He urged that LFILs compensation model should be based on functions performed by it and the operating costs thereby incurred and not on the cost of goods sourced from third party vendors in India. Thus, allocating a margin of the value of goods sourced by third party customers from exporters/vendors in India is inappropriate and unjustified. xxx xxx xxxx 39. The TPOs determination enhanced LFILs cost base for applying the operating profit over total cost margin. LFILs compensation model is based on functions performed by it and the operating costs incurred by it and not on the cost of goods sourced from third party vendors in India. Allotting a margin of the value of goods sourced by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of law framed are answered in favour of the assessee, and against the revenue. The appeal is allowed in the above terms." 12. The ratio of the aforesaid decision would also be applicable on the facts of the present case, as here also the compensation paid to the assessee is based on functions performed by it, i.e. rendering of custom clearance services to the AE on the operation costs incurred by it and not on the cost of services sourced from the third party in India. Thus, TP adjustment by applying 9% mark-up on the cost of customs clearance service rendering through Jeena cannot be made for bench marking the ALP of the assessee and accordingly such adjustments stands deleted. Thus, ground No.2 raised by the assessee stands allowed. 13. In ground no.3, the assessee has challenged the disallowance of bad debts written off a business loss of ₹ 28,76,102. The AO noted that the assessee has written off an amount of ₹ 28,76,102/- during the year under consideration. He further noted that these amounts were not shown as bad in the earlier years as there is no provision for bad debt, in the earlier years. In response to the show cause notice, the assessee filed the detai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The onus is on the assessee to prove that the amount of debt was recorded as income in its books and the same has become bad. In the present case the assessee has not maintained records of debtor's name. Further most of the amount never forms part of sale/income of the assessee business. The amount claimed as bad debts is disallowed and added back to the income of the assessee". 14. Before us, ld. Counsel, Shri Ajit Jain, submitted that the amount outstanding was towards making of payment of dues and taxes incurred on behalf of clients for providing services to them. The assessee recovers the same from its clients later on. The said amounts were actually irrecoverable in this year and therefore, it was treated as bad debts. Otherwise also, has to be treated as business loss of the current year. In support of his contention he relied upon the decisions of the Hon'ble Bombay High Court in the cases of Harshad J Choksi V/s CIT (2012) 349 ITR 250) Bom and CIT V/s Shreyas P Morakhia ((2012) 342 ITR 285 (Bom). He submitted that whatever dues could be recovered by the assessee from such clients has been offered for tax in the subsequent years and in support of this contention, he drew ..... X X X X Extracts X X X X X X X X Extracts X X X X
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