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TMI Blog2020 (8) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... th by the TPO - HELD THAT:- In the instant case, the amount of bad debts written off by the appellant has been considered as a part of operating expenses for the Engineering Segment , which has been benchmarked by the appellant using TNMM method. This is evident from the documents filed before the TPO. As per the benchmarking exercise undertaken in the transfer pricing study, four comparable companies were identified who have earned an arithmetic mean operating margin of 10.24% vis- -vis operating profit margin earned by the appellant under Engineering Services Segment . TPO has accepted the operating margin of Engineering Services Segment to meet the arm s length test, after considering the impact of bad debts written off. It is found that even if bad debts are considered as non-operating in FY 2009-10, the appellant s Engineering Segment would still meet the arm s length test. Further, we find that the TPO has not applied any method while disallowing the bad debts written off and has done the same on an ad-hoc basis - we delete the adjustment made by the AO towards bad debts written off. Adjustment of royalty payment - TPO held that since Earnings Before Interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the AY 2010-11. 2. The 1st and 2nd ground of appeal are general in nature. The 3rd to 7th grounds of appeal which relate to Direct Sales Compensation read as under : Based on the facts and circumstances of the case and in law, the appellant submit that the AO/TPO/DRP: 3. erred in disregarding the fact that the commission of 2 % of sales made by the associated enterprises ( AE') in India charged by the Appellant was consistent with the group pricing policy and practice followed globally by other group entities, and hence, the same is at arm's length. 4. erred in disregarding the corroborative benchmarking analysis undertaken by the Appellant by applying transactional net margin method (TNMM). 5. erred in benchmarking the transaction by applying Profit Split Method (PSM) even if the same was not applicable since the conditions prescribed in the Rule 10B(1)(d) of the Income-tax Rules, 1962 ( Rules') for application of the method were not satisfied. 6. erred in considering the differential price charged by AEs to the Appellant vis-a-vis third parties in India attributable to marketing activities performed by the Appellant and applying PSM by alloc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration the respective contributions of both the parties is the most appropriate approach. The DRP also rejected the allowance of any economic adjustments as contended by the appellant. Further, the DRP upheld the disallowance of bad debts and payment of royalty. In the final assessment order dated 19.12.2014, the AO observed that since the appellant has already disallowed the royalty payment to the extent of ₹ 52,65,403/- u/s 40(a)(i), relief of the said amount is to be provided. Consequently, the AO made the following adjustments : S. No. Nature of International transaction/adjustment Amount (Rs) 1. Adjustment in respect of direct sales commission 7,93,37,989/- 2. Adjustment in respect of bad debts written off 72,97,222/- 3. Adjustment in respect of royalty payment 1,05,30,806/- Total 9,71,66,017/- 4. Before us, the Ld. counsel for the assessee submits that the appellant received dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that accordingly the Tribunal held that CUP method is the most appropriate one and upheld the arm s length rate at 3.63%. Further, it is brought to our notice that in appellant s own case for AYs 2008-09 and 2009-10, the Tribunal relied on order passed by the Co-ordinate Bench in appellant s own case for AYs 2006-07 and 2007-08 and upheld CUP as the most appropriate method and confirmed the rates adopted by the Tribunal. Computing the average at 3.63% for AY 2008-09 and 3.93% for AY 2009-10, the Ld. counsel explains that based on the order of the Tribunal for AYs 2006-07, 2007-08, 2008-09 and 2009-10, the average comes to 3.42%. It is further clarified that there is no transfer pricing adjustment in the current year i.e. AY 2010-11 and the rate of 5% has been accepted as arm s length commission. Thus it is summed up by the Ld. counsel that as against the rate of commission of 8.61%, the rate that should be used should be 3.42% and therefore, a relief should be granted to the appellant to such an extent. 5. On the other hand, the Ld. Departmental Representative (DR) submits that the AO/TPO has rightly applied profit split method ( PSM ) to the transaction of receipt of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 63% :- Particulars Rate of commission accepted Sumitomo Corporation India Pvt. Ltd. v. Addl. CIT (ITA No. 5095/Del/2011) 2.26% Bayer Material Science Pvt. Ltd. (ITA No. 7977/Mum/2010) 5% Average 3.63% We have perused the facts of the case and are of the considered view that the issue involved in the present appeal is squarely covered by the order passed by the Tribunal in the assessee s own case for the A.Y. 2006-07 and A.Y. 2007-08 (ITA No. 8722 8855/Mum/2011, dated 31.12.2015), wherein the Tribunal had directed the A.O to adopt 3.63% as the appropriate rate of ALP for benchmarking the Direct Sales Compensation ( DSC ) in the hands of the assessee. We find that the assessee by relying on the rates of commission which had been accepted in the case of the said two concerns, viz. M/s Sumitomo Corporation India Pvt. Ltd. and M/s Bayer Material Science Pvt. Ltd., in their respective assessment/appeals for the year under consideration, viz. A.Y. 2008-09, had therein submitted that the aforesaid average rate of commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight of our aforesaid observations, apply mutatis mutandis in the present appeal also. 6.1 Facts being identical, we follow the above order of the Co-ordinate Bench for the immediate previous assessment year 2009-10 and direct the AO to adopt rate of commission @ 3.93% in place of 8.61% done by him and pass consequential order after due verification. Needless to say, the AO would give reasonable opportunity of being heard to the appellant before passing the order. Thus the 3rd, 4th, 5th, 6th and 7th ground of appeal are partly allowed. 7. Then we turn to the 8th and 9th ground of appeal which relate to bad debts written off of ₹ 72,97,222/-. These grounds read as under : Based on the facts and circumstances of the case and in law, the appellant submit that the AO/TPO/DRP: 8. erred in disregarding the fact that such bad debts written-off were considered as operating expenses for the purposes of computing operating margin of the Centre of Excellence in Engineering ( COEE ) segment of the Appellant which was accepted to be at arm's length by the TPO. 9. The TPO erred in exercising his jurisdiction by not computing the ALP of the international transaction by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explained by the Ld. counsel that even if the bad debts written off are considered as non-operating in FY 2009-10, the appellant s Engineering Segment would still meet the arm s length test. Finally, it is submitted by the Ld. counsel that the TPO has not applied any method while disallowing bad debts written off and has done the same on ad-hoc basis. 9. On the other hand, the Ld. DR submits that in the absence of adequate justification and supporting evidence for the write off of specific entries receivable by the appellant from its AEs, the AO/TPO is justified in computing the arm s length price of the said transaction as Nil. 10. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. In the instant case, the amount of bad debts written off by the appellant has been considered as a part of operating expenses for the Engineering Segment , which has been benchmarked by the appellant using TNMM method. This is evident from the documents filed before the TPO. As per the benchmarking exercise undertaken in the transfer pricing study, four comparable companies were identified who have earned an ari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP further agreed with the TPO by stating that : The EBIT of the Project Activity segment is negative and hence no payment of royalty is warranted. The appellant did not file the accounts which were called by the TPO. The RBI guidelines mention that royalty for trademarks cannot be paid in access of 1% of the net sales under the automatic route whereas the appellant has paid royalty @ 1.5% and no specific approval has been obtained by the appellant in this regard. The AO by following the direction of the DRP made an adjustment of ₹ 1,05,30,806/-. 12. Before us, the Ld. counsel for the assessee submits that as per agreement dated 01.10.2006 titled Technical Support and License Agreement , JCTC has licensed technology and trademarks to the appellant. The same is intended to apply to appellant s Building Efficiency business and that such royalty was payable only if it had a positive EBIT. Further, it is stated that the financial statements of the appellant report three segments viz. project activity, global workplace solutions and engineering services. The details as submitted are as under : The Project Activity consists of Building Automati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld. DR supports the order passed by the AO on the ground that (i) the EBIT of the Project Activity segment is negative and hence no payment of royalty is warranted, (ii) the appellant did not file the accounts which were called for by the TPO. Thus the Ld. DR submits that the order passed by the AO be confirmed. 14. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decision are given below. As mentioned earlier, the appellant has filed before the Tribunal on 11.12.2017 a certificate from the management stating that the Building Efficiency segment comprises of Project Activity segment as well as Engineering Segment . Further, it is stated by him that the appellant has filed additional evidence vide letter dated 03.07.2019 i.e. a certificate from Chartered Accountant supporting the contentions of the appellant that Building Efficiency segment (i.e. aggregate of Project Activity segment and Engineering Segment) had a positive EBIT and accordingly royalty is paid as per the Royalty Agreement. In the instant case, we are of the considered view that the above documents filed on 11.12.2017 and 03.07.2019 are qui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 3,47,603/- for the impugned assessment year, after due verification. 17. The 14th ground of appeal on levy of interest u/s 234D is consequential in nature. As penalty has been initiated only, the 15th ground of appeal against initiation of penalty u/s 271(1)(c) is premature. 18. The appellant has filed an additional ground stating that the AO has erred in not setting off the brought forward business loss and unabsorbed depreciation, as claimed in the return of income filed u/s 139(1) of the Act and erred in not granting carry forward of balance business loss and unabsorbed depreciation to the subsequent years, while computing the total income. As the above additional ground of appeal is closely linked with the original ground of appeal, we admit the former for adjudication. The Ld. counsel submits that in the return of income for the impugned assessment year the appellant has reported income from business and profession amounting to ₹ 32,52,102/-, which had been set off by the brought forward business loss of ₹ 4,67,91,561/- pertaining to AY 2006-07, resulting in Nil income. It is stated by him that the AO held in his draft assessment order for AY 2010- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strict enforcement of health advisories with a view of checking spread of Covid-19. The epidemic situation in Mumbai being grave, there was not much of a relaxation in subsequent lockdowns also. In any case, there was unprecedented disruption of judicial work all over the country. As a matter of fact, it has been such an unprecedented situation, causing disruption in the functioning of judicial machinery, that Hon'ble Supreme Court of India, in an unprecedented order in the history of India and vide order dated 6.5.2020 read with order dated 23.3.2020, extended the limitation to exclude not only this lockdown period but also a few more days prior to, and after, the lockdown by observing that In case the limitation has expired after 15.03.2020 then the period from 15.03.2020 till the date on which the lockdown is lifted in the jurisdictional area where the dispute lies or where the cause of action arises shall be extended for a period of 15 days after the lifting of lockdown . Hon'ble Bombay High Court, in an order dated 15th April 2020, has, besides extending the validity of all interim orders, has also observed that, It is also clarified that while calculating time fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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