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TMI Blog2020 (11) TMI 220X X X X Extracts X X X X X X X X Extracts X X X X ..... djustment 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber Appellant by : Shri Devendra Jain , A. R Respondent by : Shri Akhtar Hussain Ansari , D. R ORDER PER RAVISH SOOD , JM The present appeal filed by the assessee is directed against the order passed by the CIT(A)-15, Mumbai, dated 14.07.2014, which in turn arises from the assessment order passed by the A.O under Sec.143(3) of the Income Tax Act, 1961 (for short Act ), dated 04.03.2013 for A.Y. 2010-11. The assessee has assailed the impugned order on the following effective grounds of appeal before us: 1. On facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the disallowance of expenditures amounting to ₹ 12,26,063/- incurred during the period from 20/04/2009 to 31/07/2009 by treating them as pre commencement expenditure and in the nature of Capital Expenditure. 2. Without prejudice to ground no. 1, the Ld. CIT(A) has erred in allowing the above mentioned expense of ₹ 12,26,063/- as deduction u/s 35D as 1/10th of the expense over a period of 10 years instead of 1/5th of the expenses over 5 years. 3. On facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d an amount of ₹ 7,52,637/- that was reimbursed by the parent company i.e M/s Global Conference Organizers, B.V, Netherland, on the basis of the invoices which were raised by the assessee company. In the backdrop of the aforesaid facts, the A.O called upon the assessee to explain as to why the expenses made prior to the commencement of its business amounting to ₹ 12,26,063/- [₹ 1,78,700/- (-) ₹ 7,52,637/-] may not be disallowed being in the nature of pre-commencement expenses. In reply, it was submitted by the assessee that as the infrastructural facilities were set up, business assignments were explored/negotiated and manpower was recruited by 02.05.2009, therefore, its aforesaid claim of expenses incurred during the period 20.04.2009 to 30.07.2009 was in order and allowable as deduction u/s 37(1) of the Act. However, the A.O not finding favour the aforesaid claim of the assessee disallowed the aforesaid expenses of ₹ 12,26,063/-(net of reimbursement), by treating them as pre-commencement expenses within the meaning of Sec.35D of the Act. Apart from that, it was observed by the A.O that the assessee during the year under consideration had entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding 31.03.2009 For the year ending 31.03.2010 A. Income 1. Sales 2.07 2.12 1.50 2. Change in stock - 0.21 - 3. Total Income 2.07 2.33 1.50 B. Expenses 4. Operating Expenses 2.06 2.20 1.77 5. Depreciation 0.11 0.11 0.07 6. Write Off - 0.02 - 7. Other Expenses - 0.01 - 8. Total Expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s making company excluded it from the final list of comparables. As regards the assessee s claim for working capital adjustment of 2.5% and risk adjustment of 2%, it was observed by the A.O that the assessee had neither in the TP study report nor in its submissions quantified the aforesaid adjustments. Accordingly, the plea of the assessee for working capital adjustment and risk adjustment was rejected by the A.O. Insofar the claim of the assessee that 2% adjustment be allowed for the difference of the financial period of 8 months of the assessee as in comparison to that of 12 months of the comparables, it was observed by the A.O that as the margin was computed in terms of percentage provided, thus, the said claim of the assessee did not merit acceptance. On the basis of his aforesaid deliberations, the A.O worked out the average PLI of the comparables (after excluding M/s Cethar Consultancy Services Pvt. Ltd.) at 13.15%, as under: Sr. No. Final list of comparable from both the data bases leaving behind M/s Cethar CSPL OP/TC% 1. Aisa H.R. Technologies Ltd. -2.44 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 05.2009, and prior to entering into an agreement with its parent company viz. M/s Global Conference Organizers, B.V, Netherland, on 01.08.2009, it had during the year interregnum period i.e 20.04.2009 to 31.07.2009 incurred expenses towards directors remuneration, employees salary, lease rentals, professional fees, technical fees and other administration expenses, viz. telephone charges, electricity etc. In the backdrop of the aforesaid facts, it was submitted by the ld. A.R that as the assessee company had set up its business, therefore, its claim of expenses incurred wholly and exclusively for the purpose of its business, though prior to the commencement of the business was allowable under Sec. 37(1) of the Act. In support of his aforesaid contention, the ld. A.R had relied on the judgment of the Hon ble High Court of Delhi in the case of Omnigloble Information Tech India (P) Ltd. Vs. CIT (2014) 369 ITR 1 (Del). It was the claim of the ld. A.R, that as the assessee was into service sector, therefore, the date of recruitment of manpower, installing of computers and setting up of adequate infrastructure were the relevant factors for determining the date of setting up of it busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Bombay in the case of CIT Vs. Goldman Sachs (I) Securities (P) Ltd. (2016) 69 taxman.com 19 (Bom). Alternatively, it was submitted by the ld. A.R, that now when the A.O had rejected one of the comparable company on the ground that it was a loss making company, therefore, on similar lines he ought to have excluded another comparable, i.e M/s En Pointe Technologies India Pvt. Ltd, for the reason, that the latters margin was substantially highly pitched at 31.18%. In support of his aforesaid contention the ld. A.R had relied on the order of the ITAT, Pune bench in the case of Songaurd Solutions (I) Pvt. Ltd. Vs. ADIT (2016) 68 taxman.com 89 (Pune). In the backdrop of his aforesaid contentions, it was submitted by the ld. A.R that as the international transactions of the assessee company were at arm s length, therefore, no adjustment was called for in its case. 5. Per contra, the ld. Departmental Representative (for short D.R ) relied on the orders of the lower authorities. It was submitted by the ld. D.R that the CIT(A) had rightly upheld the disallowance of the pre-commencement expenses incurred by the assessee i.e for the period 20.04.2009 to 31.07.2009, and had restricted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e permissible as a deduction under Sec. 37 of the Act. Our aforesaid view is fortified by the judgment of the Hon ble High Court of Bombay in the case of CIT Vs. Axis Private Equity Limited [ITA No. 1204 of 2014, dated 30.01.2017]. In its aforesaid order, the Hon ble High Court relying on its earlier judgment in the case of Western India Vegetables Products Ltd. Vs. CIT(1954) 26 ITR 151 (Bom), had held, that business is said to have been set up when it is established and ready to commence. As observed by the High Court, there may be an interval between a business which is set up and a business which is commenced. However, all expenses incurred during the interregnum period between setting up of business and commencement of business would be permissible deductions. Observing, that the assessee before them had set up its business, which, however, was disallowed by the A.O on the ground that the assessee had not yet commenced its business, the High Court had upheld the view taken by the Tribunal which had allowed the assessee s claim for deduction of the expenses incurred during the interregnum period. In fact, we find, that the Hon ble High Court in its aforesaid order had re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for carrying on the business were installed. In the case of Styler India (P) Ltd. Vs. JCIT (2008) 116 TTJ 333 (Pune)(TM), the assessee was engaged in service and consultancy sector and was into the business of supplying knowledge and technology to its customers. It was the 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. Rebutting the aforesaid claim of the assessee, the A.O was of the view that the aforesaid activities of the assessee would not be sufficient to bring the business in ready to commence position. On appeal, the ld. Third Member concurring with the view taken by the ld. accountant member decided the issue in favour of the assessee. Similarly, in the case before the Hon ble High Court of Madras in the case of CIT Vs. Club Resorts P. Ltd. (2006) 287 ITR 552 (Mad), the assessee was engaged in the business of selling time share units at places of tourist interest. It was the claim of the assessee that when the canvassing staff for promoting the assessee s business was appointed and the sales personnel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .35 crores for the year ending 31.03.2010, however, it had made profit of (+) ₹ 0.01 crore for the year ending 31.03.2009. It is the claim of the assessee before us that the lower authorities had erred in stamping the aforesaid comparable company as a persistent loss making company for three years. It is in the backdrop of its aforesaid claim, that the ld. A.R had tried to impress upon us that the authorities below were in error in excluding the aforesaid comparable from the final list of comparable companies while benchmarking its international transactions. On the contrary, we find, that the A.O in the assessment order had observed that the difference in the working of the margins had arisen because the assessee had considered write off (bad debts) as a non-operating expense. It was observed by the A.O had that after treating the bad debts as an operational expense, the margin of the aforesaid company was negative for all the three years. At this stage, we may herein observe that the assessee had neither rebutted the said observation of the A.O before the lower authorities nor any contention to dislodge the same had been made before us by the ld. A.R. 8. We have delibera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its TP study report for the year under consideration. Apart from that, the said comparable i.e M/s En Pointe Technologies India Pvt. Ltd, cannot be excluded from the final list of comparables on the standalone basis that of its high margin. 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. 10. We shall now advert to the claim of the assessee that the lower authorities had erred in not making risk adjustment of 2% while computing the ALP under Sec. 92C of the Act. It is the claim of the assessee, that as it is a captive unit of its parent company viz. M/s Global Conference Organizers, B.V, Netherland, therefore, it ope ..... X X X X Extracts X X X X X X X X Extracts X X X X
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