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TMI Blog2018 (10) TMI 203X X X X Extracts X X X X X X X X Extracts X X X X ..... iance if these two companies were considered as comparables. Thus, the assessee is aggrieved by the action of both the lower authorities in respect of trading segments also and analysis of the factual matrix shows that the lower authorities have also not duly considered the averments of the assessee in respect of the trading transactions. The facts in AY 06-07 and in the year under consideration are identical except the fact that during the year under consideration, the assessee was not into any manufacturing activity except processing of crude oil. Accordingly, in view of the facts and circumstances of the case, we deem it appropriate to remit the entire issue of transfer pricing to the office of the Assessing Officer/ TPO who will readjudicate the issue de novo. Disallowance of miscellaneous expenses - CIT(A) had entertained fresh evidences/submissions filed by the assessee without affording a reasonable opportunity to the Assessing Officer - Held that:- AR has submitted that he has no objection if the issue is restored to the file of the Assessing Officer for verification. Accordingly, we restore the issue of disallowance of miscellaneous expenses to the file of the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - CIT (A), while allowing relief to the assessee, has given relief to the assessee on the ground that the expenses were incurred in the normal course of business and further that the Assessing Officer could not question the commercial expediency of the assessee. However, the fact remains that the evidences in support of the expenses having been incurred were not examined at any stage. Accordingly, this issue is also restored to the file of the Assessing Officer for the purpose of examining the issue afresh in light of the evidences and explanations which the assessee might like to file in this regard. The Assessing Officer is directed to afford a proper opportunity to the assessee before adjudication of the issue. Depreciation on computer peripherals - @25% as against 60% - Held that:- We are in agreement with the averments of the Ld. AR that the issue stands covered in favour of the assessee by a judgment of the Hon’ble Delhi High Court in the case of BSES Rajdhani Power Ltd. (2010 (8) TMI 58 - DELHI HIGH COURT) and accordingly, we find no reason to interfere with the findings of the Ld. CIT(A) on this issue allowing depreciation @ 60%. Disallowance on account of service inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Managerial remuneration 13,489,178 6. Quality allowance 5,281,914 7. Legal and professional expenses 19,972,977 8. Depreciation on computer accessories 708,798 2.1 During the year under consideration, the assessee had entered into various international transactions with its Associated Enterprises out of which the following were subjected to a transfer pricing adjustment:- Particulars Transaction value (Rs Crores) TP adjustment value (Rs Crores) TP method adopted by appellant in TP documentation Merchanting trade transactions (purchase) 684.24 38.02 Transactional Net Margin Method ( TNMM )) Merchanting trade transactions (sale) 684 85 Purchase of fertilizers 138.26 8.83 Comparable Uncontrolled Price ( CUP ) meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceeded to calculate the OP/Sales at 7.11% and considering the assessee s corresponding OP/Sales margin of -3.9%, a TP adjustment of ₹ 4.14 crore was recommended. Subsequently, the Assessing Officer gave effect to the total TP adjustment of ₹ 50.17 crore recommended by the TPO. 2.5 Aggrieved, the assessee carried the issues to the Ld. Commissioner of Income Tax (A). In respect of the corporate tax grounds, the Ld. Commissioner of Income Tax (A) allowed the assessee s claim of expenditure and deleted the disallowances in respect of miscellaneous expenditure, managerial remuneration, quality allowance, legal and professional expenses and depreciation on computer peripherals. However, the Ld. Commissioner of Income Tax (A) upheld the order of the Assessing Officer in disallowing write off of service income receivable. 2.6 In respect of the transfer pricing additions with regard to merchanting trade transaction, the Ld. Commissioner of Income Tax (A) considered Resale Price Method (RPM) as the Most Appropriate Method and benchmarked the transactions and, thereafter, used gross profit/cost of goods sold for calculating PLI under the RPM. In respect of trading of comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods Sold while computing the margin of the Appellant and comparable companies for the purpose of benchmarking the international transaction relating to import of fertilisers. 1.9 The Learned CIT (A) has erred in rejecting corroborative benchmarking analysis and PLI used by the appellant for its merchanting business, i.e., Berry Ratio while applying he TNMM for benchmarking the international transaction pertaining to merchanting activities. 1.10 The Learned CIT (A) erred in computation of the Arm s Length Price, which is not in accordance with the Proviso to section 92 C (2) of the Act. 2. Grounds relating to Corporate Tax Matters 2.1 That on the facts and circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) - XX (hereinafter Learned CIT(A)) has erred in upholding the disallowance amounting to ₹ 52,98,635 on account of service income receivable written off during the subject year. 2.2 That on the facts and circumstances of the case and in law, the Learned CIT (A) has erred in not allowing the deduction of service income written off under section 36(1)(vii) of the Income Tax Act, 1961 (Act) even though all t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pherals and accessories. 3. The department s appeal was taken up first and in respect of ground no. 1 pertaining to deletion of addition of ₹ 2,51,368/- on account of disallowance of miscellaneous expenses, the Ld. CIT DR submitted that the assessee had failed to submit the requisite details during the assessment proceedings and further submitted that the Ld. CIT(A) had entertained fresh evidences/submissions filed by the assessee without affording a reasonable opportunity to the Assessing Officer to counteract the same. Our attention was also drawn to the relevant paragraphs of the impugned order and it was submitted that the Ld. CIT (A) had allowed the relief to the assessee without any discussion. 3.1 In response, the Ld. AR placed reliance on the order of the Ld. CIT (A) but fairly conceded that since the details were not available for being produced before the Bench, the issue may be restored to the file of the Assessing Officer for de novo examination and verification. 3.2 In respect of ground no. 2 relating to deletion of addition of ₹ 1,34,89,178/- on account of restricting the claim of the assessee on managerial remuneration, the Ld. CIT DR submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. CIT (A) had deleted the addition on the ground that the Assessing Officer had not asked the assessee to provide ledger accounts and other documentary evidences and had only asked the assessee to explain the nature and methodology of calculating the same. It was submitted that this observation finds mention in the impugned order of the Ld. CIT (A) and therefore, if the assessee was not asked to produce the details, it cannot be faulted for not submitting the same. 3.6 In respect to ground no. 5, the Ld. CIT DR submitted that there was a substantial increase in the legal and professional expenses in the year under consideration as compared to the immediately preceding year and the assessee company was asked by the Assessing Officer to furnish details of the same along with relevant documentary evidences and proof of tax having been deducted at source. It was further submitted that the assessee company could produce TDS documents in respect of only two parties and, therefore, the Assessing Officer proceeded to disallow 50% of the unsubstantiated amount. It was further submitted by the Ld. CIT DR that the Ld. CIT (A) had allowed relief to the assessee based only on the submissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argin and, accordingly, the related marginal costs were also extremely minuscule in comparison to the overall cost base and, therefore, the assessee did not allocate any operating expenses to the merchant trade segment. It was further submitted that the TPO did not appreciate the rationale behind the assessee in not allocating any operating expenses to the merchanting trade segment and was erroneous in drawing the conclusion that the assessee had, in effect, applied Resale Price Method. It was also submitted that the TPO did not provide the assessee any opportunity of being heard before replacing the TNMM with the RPM. It was also submitted that this issue was also raised before the Ld. CIT (A). It was further submitted that the Ld. CIT (A) further proceeded to characterize the merchanting activity as a trading activity and, thereafter, proceeded to compute the PLI by considering the gross profit margin based on cost of goods sold. It was also submitted that the Ld. CIT (A) rejected two out of the five comparables of the assessee viz. ELF Trading Chemicals Manufacturing Ltd. and Godrej Foods Limited. The Ld. AR also submitted that ITAT Delhi Bench in assessee s own case for asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT (A) with respect to RPM was incorrect. With respect to the justification of using Fertecon as CUP by the assessee, the Ld. AR submitted that even public sector undertakings like IFFCO, MMTC, National Fertilizers Ltd. and Sinochem subscribed to the journal published by Fertecon and considered the rates as reported in Fertecon s journal for their pricing. It was also submitted that in assessee s own case of Cargill Foods Limited (known as Cargill India Ltd. after merger), the ITAT Pune Bench had accepted third party/brokers quotation as valid CUP. It was submitted that the rates published by Fertecon were better than third party/brokers quotes and, therefore, the assessee s case stood on a stronger footing. It was also submitted that in assessee s own case for assessment year 2006-07 in ITA No. 4095/Del/201, the ITAT had not drawn any adverse inference in regard to validity of CUP pertaining to trading of commodities undertaken by the assessee and further in subsequent assessment years 2007-08, 2008-09, 2009-10 and 2010-11 and 2011-12, the TPO has not drawn any adverse inference in regard to validity of CUP pertaining to trading of commodities undertaken by the assessee. The Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of accounts of the assessee. It was submitted that these claims were similar to bad debts and it was not required to prove that they had actually become bad. The Ld. AR submitted that the ld. CIT (A) had not accepted the assessee s contention that these claims were in the nature of bad debts. Our attention was also drawn to the ledger accounts of the advance written off accounts to demonstrate that the same had been written off in the books of the accounts of the assessee. 4.8 In response, the Ld. CIT DR submitted that the issue may be restored to the file of the Assessing Officer with a direction to verify the assessee s claim. 5. We have heard the rival submissions and perused the material available on record. As far as the department s appeal is concerned, it is seen that in respect of ground no. 1 challenging the action of the Ld. CIT (A) in deleting the addition of ₹ 251,368/- on account of disallowance of miscellaneous expenses is concerned, the Ld. AR has submitted that he has no objection if the issue is restored to the file of the Assessing Officer for verification. Accordingly, we restore the issue of disallowance of miscellaneous expenses to the file of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the department s appeal stands allowed for statistical purposes. 5.3 With respect to ground no. 4 relating to deletion of addition of ₹ 1,99,72,977/- out of legal and professional expenses, the Assessing Officer has observed that the assessee could submit TDS documents in respect of only two of the parties. Thereafter, the Assessing Officer has not mentioned whether the documentary evidences in respect of other parties were available or not or whether the same were examined by him or not and he has proceeded to disallow 50% of the balance amount on an ad hoc basis. The Ld. CIT (A), while allowing relief to the assessee, has given relief to the assessee on the ground that the expenses were incurred in the normal course of business and further that the Assessing Officer could not question the commercial expediency of the assessee. However, the fact remains that the evidences in support of the expenses having been incurred were not examined at any stage. Accordingly, this issue is also restored to the file of the Assessing Officer for the purpose of examining the issue afresh in light of the evidences and explanations which the assessee might like to file in this regard. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly by the lower authorities so as to reach a logical and reasonable conclusion. Similarly, with respect to the international transaction relating to sale of rice, the assessee has applied CUP which was based on quotations of a broker whereas the TPO has applied TNMM. The TPO has included comparables like Satnam Ovedrseas Ltd. and KRBL Ltd. which were into manufacturing whereas the assessee s case is that it was only into trading activity. Further, the Ld. CIT (A), while confirming the inclusion of Satnam Overseas Ltd. and KRBL Ltd., has also included FCI and KRIBHCO Ltd. to which the assessee s objection is that these both were hugely subsidized companies whereas the assessee did not have any benefit of any subsidy and, therefore, the PLI would be at a great variance if these two companies were considered as comparables. Thus, the assessee is aggrieved by the action of both the lower authorities in respect of trading segments also and analysis of the factual matrix shows that the lower authorities have also not duly considered the averments of the assessee in respect of the trading transactions. The ITAT Delhi Bench in assessee s own case for assessment year 2006-07 in ITA No. 409 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case from all angles. Needless to say that assessee will be given sufficient opportunity of being heard. In view of the above, ground No. 1 is allowed for statistical purposes. 6.01 It is seen that the facts in AY 06-07 and in the year under consideration are identical except the fact that during the year under consideration, the assessee was not into any manufacturing activity except processing of crude oil. Accordingly, in view of the facts and circumstances of the case, we deem it appropriate to remit the entire issue of transfer pricing to the office of the Assessing Officer/ TPO who will readjudicate the issue de novo and the assessee will be free to argue its case from all angles. Needless to say, the assessee will be given sufficient opportunity of being heard. Accordingly, ground nos. 1.1 to 1.10 stand allowed for statistical purposes. 6.1 As far as ground nos. 2.1 and 2.2 relating to confirmation of disallowance amounting to ₹ 52,98,635/- on account of service income receivable written off during the year is concerned, it is not in dispute that the amounts were written off. The Ld. AR has referred to relevant pages in the ledger account and as contained in p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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