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TMI Blog2021 (6) TMI 172X X X X Extracts X X X X X X X X Extracts X X X X ..... ture but however observed exclusion of companies by the AO/TPO having bad debt for the purpose of comparability is not justified. Therefore, we agree with the finding of ld. CIT(A) to the extent of inclusion of comparable companies having bad debt in the final set of comparable companies. Therefore, in the facts and circumstances of the case considering the submissions of ld. AR and ld. DR, we deem it proper to remand the matter to the file of AO and accordingly, the AO/TPO is directed that the provision for bad debt should be treated as non-operating expenditure while computing the profitability of the assessee which has been disallowed as an expense while computing the income under the ITR. The ad-hoc bad debts filter as applied by the TPO liable to be rejected and to include the comparable companies having bad debt should be considered in the final set of comparables. - ITA No.584/PUN/2015, ITA No.620/PUN/2015 - - - Dated:- 3-6-2021 - Shri R.S. Syal, Vice President And Shri S.S. Viswanethra Ravi, Judicial Member For the Assessee : Shri Ajit Kumar Jain For the Revenue : S/Shri Kalika Singh Mahadevan A.M. Krishnan ORDER PER S.S. VISWANETHRA RAVI, J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that the provisions of section 10A(7) of the Act is not applicable to the fact that the net profit earned by it is not more than ordinary profit. The CIT(A) observed that section 10A(7) can be applied even if there is no corresponding benefit derived by other party and closely connected enterprises by arranging their international transactions amongst themselves denying the right share of revenue as provide in the statute. Therefore, according to him the closely arranged between the assessee and other parties reducing its domestic tax base and sub-section (7) of section 10A of the Act be denied excessive tax collection i.e. deduction on more than ordinary profit in the eligible business. The ld. AR placed on record the order dated 06-03-2019 passed by this Tribunal in assessee s own case in ITA No. 473/PUN/2016 for A.Y. 2011-12 and submitted the similar issue came up before this Tribunal and the Tribunal by placing reliance in the case of CIT Vs. Schmetz India Pvt. Ltd. of Hon ble Bombay High Court and directed to delete the addition made thereon by invoking section 10A(7) of the Act. The Tribunal came up such conclusion basing on the order of this Tribunal in assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abused by manipulation of profits. In our considered opinion, the aforesaid explanation in the CBDT Circular (supra) signifies the legislative intent and it is also manifested in the language of section 10A(7) r.w.s. 80-IA(10) of the Act. We say so for the reason that the phraseology of section 80-IA(10) of the Act itself suggests that the profits and gains of an eligible business cannot be tinkered with by the Assessing Officer merely because they are more than the ordinary profits or that they are quite high. The existence of substantial or more than ordinary profits by itself does not sufficiently empower the Assessing Officer to disregard them and determine the profits which he may consider to be reasonably deemed to have been derived therefrom. The presence of the expression the course of business is so arranged . that the business transacted produces to the assessee more than ordinaryprofits is significant and its understanding has to be prefaced by the legislative objective of plugging abuse of the tax concessions granted u/s 10A of the Act by manipulation of profits between associated parties. In other words, the import of the expression so arranged has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerned. On this basis, the Ld. CIT-DR submitted that undeniably there is an agreement between the assessee and the associated enterprises whereby the services have been provided by the assessee to them and therefore the same is to be understood as an arrangement within the meaning of section 10A(7) r.w.s. 80-IA(10) of the Act. Along with the aforesaid, it has also been emphasized, on the basis of the language of section 80-IA(10) of the Act that, the Assessing Officer is not required to be prove that there is an arrangement for producing more than ordinary profits. Whereas, as per the Ld. CIT-DR, section provides that arrangement leading to production of more than ordinary profit will satisfy the necessary condition of section 80- IA(10) of the Act. Thus, according to the Ld. CIT-DR, in the instant case there is an arrangement and it has lead to production of more than the ordinary profits. According to the Ld. CIT-DR, the meaning of the words so arranged in section 80-IA(10) of the Act only seeks to ensure that there was an agreement between the assessee and associated enterprise. 25. We have carefully examined the aforesaid contentions of the Ld. CITDR. In our consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... members or any class of them, or between the company and its members or any class of them, which would necessarily mean that it must be an agreement or understanding which affects their rights [underlined for emphasis by us] 27. The aforesaid clearly points out that the Hon ble High Court imparted meaning to the word arrangement in the context of section 391(1) of the Companies Act, 1956 to mean that it must be an agreement or understanding which affects the rights between the company and its creditors or any class of them and between the company and its members or any class of them. By the same analogy in the present context, we have to understand the meaning of the expression as arranged in section 10A(7) r.w.s. 80-IA(10) of the Act to mean a situation whereby the course of business has been so arranged that the business transacted produces to the assessee more that the ordinary profits with an intent to abuse the tax concessions granted in section 10A of the Act. Moreover, if one is to understand the import of the expression so arranged in section 80-IA(10) of the Act as canvassed by the Ld. CIT-DR, it would mean that for the purposes of fulfillment of the cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence and not on surmise or suspicion. The question is not whether the onus is light or heavy but whether the AO has discussed objectively the conditions mentioned in the section to disturb the results declared by the appellant. In this case, the AO has failed to adduce any evidence or reason to satisfy the invoking of s. 80-1(9). First of all, a mere substantial profit does not give rise to any valid view that there could be any arrangement. It is a case of joint venture listed Indian company, where all arrangements are open for scrutiny and acceptance not only by digital group worldwide but also from joint venture partners and shareholders. Digital group overseas will not pay undue sum, which it cannot recoup entirely to exclusion of others. Hence nothing can be arranged to the exclusive benefit of overseas partner. One cannot presume the existence of close connection or possibility of an arrangement for earning more than ordinary profits. In this case the profits earned is comparable with the profits earned by other companies in the same industry. Hence there is no case for further verification. The AO has compared the profit of software unit with that of hardware unit. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer to say that assessee has earned more than ordinary profits which might be expected to arise in such a business. Be that as it may, the aforesaid is not enough to say that the course of business has been so arranged to result in more than ordinary profits. However, from the side of the Revenue, it was pointed out that the Transfer Pricing comparability analysis itself suggests that the profit margins of the assessee are more than the ordinarily accepted margin in this line of business. The moot question is as to whether the same can be considered as a material to indicate that the course of business between the assessee and the associated enterprises has been so arranged, so as to result in more than the ordinary profits within the meaning of section 10A(7) r.w.s. 80-IA(10) of the Act. In this context, we may refer to the decision of the Chennai Bench of the Tribunal in the case of Visual Graphics Computing Services India (P) Ltd. vs. ACIT, 148 TTJ 621 (Chennai), wherein following discussion is relevant :- We heard both sides in detail and considered the issue. As far as the present case is concerned, the Transfer Pricing Officer has made a categorical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no need of transfer pricing adjustment, the matter should end there and any other adjustment that the Assessing Officer would like to make with reference to the first segment must be made independent of the order of the Transfer Pricing Office under section 92CA. To state in simple terms, the transfer pricing regime is different from regular computation of income. Section 10A belongs to that part of regular computation of income and it should be computed independent of transfer pricing regulations and transfer pricing orders. It is not therefore, permissible for the Assessing Officer to work out section 10A deduction on the basis of arm's length price profit generated out of the order of the Transfer Pricing Officer. In fact these issues have already been considered in various orders of the Tribunal. The Income-tax Appellate Tribunal, Chennai A Bench in the case of Tweezerman (India) P. Ltd. v. Addl. CIT [2010] 4 ITR (Trib) 130 (Chennai) (133 TTJ 308) has considered the matter in detail and held that the reduction of eligible profits of an assessee as done by the Assessing Officer by invoking the provisions of section 80- IA(10) read with section 10B(7), in the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ows :- Accordingly, the section only encumbers the A.O. to examine if the profits derived from the eligible business by the assessee is more than the ordinary profits, then the A.O. has to arrive as to what could be the reasonable profit from the such eligible business and such profit has to be then taken as reasonably deemed to have been derived from the eligible business for the purposes of computing deduction under the section. 33. The aforesaid discussion in the assessment order reveals that as per the Assessing Officer, the existence of close connection and more than ordinary profits is enough to assume an arrangement as contemplated u/s 80- IA(10) of the Act. The aforesaid understanding, in our view, is directly contrary to the judgement of the Hon ble Karnataka High Court in the case of H.P. Global Soft Ltd. (supra) and our discussion in the earlier part of this order. 34. In view of the aforesaid, we conclude by holding that in the present case, the Assessing Officer has not proved that any arrangement had been arrived between the parties which resulted in higher profits. Consequently, the re-working of the profits by Assessing Officer by invoking section 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith respect to the provision for bad debt amounting to ₹ 13,27,38,882/- that this expenditure has been disallowed in the computation of total income under the Income Tax return filed by assessee for A.Y. 2005-06 and the provision for bad debts amounting to ₹ 13,27,38,882/- should be treated as non-operating expenditure for the purpose of computing profitability under transfer pricing provisions. The ld.AR placed reliance on the Pune ITAT judgement in case of Bilcare Limited in ITA No.1693/PUN/2018, wherein it was held that the costs disallowed in return of income should be excluded from the cost base while computing the PLI for transfer pricing purposes. The ld. AR submits that provision for bad debts should be considered as non-operating in nature for computation of PLI of the assessee as the same is disallowed as an expense while computing the income under the ITR. The TPO applied a filter of bad -debt expenses for eliminating the 5 out of 10 TP study comparable companies and considered only those comparables having bad debts. Application of such ad-hoc filters to reject the functionally comparable companies would be an incorrect approach and against the express provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure in respect of provision for bad debt in the computation of total income for A.Y. 2005-06 and accordingly, the said provision should be treated, in our opinion as non-operating expenditure for the purpose of computing profitability under the transfer pricing provisions. Further, we note that in Para No. 4.4.9 of the impugned order the ld. CIT(A) held the bad debt is an operating expenditure but however observed exclusion of companies by the AO/TPO having bad debt for the purpose of comparability is not justified. Therefore, we agree with the finding of ld. CIT(A) to the extent of inclusion of comparable companies having bad debt in the final set of comparable companies. Therefore, in the facts and circumstances of the case considering the submissions of ld. AR and ld. DR, we deem it proper to remand the matter to the file of AO and accordingly, the AO/TPO is directed that the provision for bad debt should be treated as non-operating expenditure while computing the profitability of the assessee which has been disallowed as an expense while computing the income under the ITR. The ad-hoc bad debts filter as applied by the TPO liable to be rejected and to include the co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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