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TMI Blog2021 (7) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... on, role and responsibility and the amount of salary paid, more particularly when there is a disproportionate difference between the salary expenditure incurred by the comparable companies with the salary expenditure of the assessee and there are seconded employees who are necessarily deputed to the assessee for the purpose of development of the business, the claim the assessee needs to be re-examined with the details furnished. This is more so when learned dispute resolution panel accepted that there is a higher depreciation claim in the case of assessee compared to the comparable companies - we set aside ground back to the file of the learned transfer pricing officer with a direction to examine the claim of the assessee that those expenditure on salary of the employees who are working for the development of the business and not for earning the operating profit for the year requires proper adjustment. Import duty adjustment carried out by the assessee on account of huge difference in import duty cost of the assessee as well as of the comparable should also be eliminated from the operating expenses of the assessee - We hold that as necessary consumption of the material is only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 144C of the Income Tax Act, 1961 (the Act) dated 26.10.2017 pursuant to the direction of the ld. Dispute Resolution Panel-1, New Delhi, [The LD DRP] dated 22.09.2017 wherein the adjustment proposed by the ld. DCIT, Transfer Pricing 1(3)(1), New Delhi, [The LD TPO] per order passed under Section 92CA(3) of the Act on 20th October, 2016 was incorporated and assessee's assessed loss was determined at ₹ 31,814,920/- against the returned loss of ₹ 98,373,479/-. 2. The assessee has raised following grounds of appeal:- 1. The Ld. AO DRP has erred in law and on facts and circumstances of assessee's case in making the additions/disallowances amounting to ₹ 6,65,58,555/- to the total income of the assessee. The additions/disallowances made are wholly illegal, erroneous and untenable in law and on the facts of the case of the assessee and are prayed to be deleted. 2. The order of assessment is bad in law and on the facts of the case. Grounds of Objections against Transfer Pricing Adjustments 3. The Ld. TPO and consequently the Ld. DRP AO has grossly erred in law and on facts and circumstances of the appellant's case in making a transfer pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be upheld. 8. That each ground is independent of and without prejudice to the other grounds raised herein. 3. During the course of hearing on 10th March, 2021 assessee also preferred an additional ground of appeal which was omitted to be raised as under:- 12. The Ld. AO has erred in law and in facts in proposing a disallowing under section 37 of the Income Tax At, 1961 of provisions for doubtful debts (Bad Debts) of ₹ 42,39,000/- by treating the same as excess provision without appreciating the facts legal submissions of the assessee company in this regard. 4. This Ground of appeal was already before Ld. DRP but there is no adjudication on the same. This was not raised in original appeal memo but now raised. 5. Brief facts of the case shows that assessee is a company incorporated on 26th July, 2011 as joint venture of Keihin Corporation, Japan and Keihin Asia Bangkok Company Limited wherein Japan entity holds 70% equity and Bangkok company held 30%. It is engaged in the business of manufacturing of Compressed Natural Gas (CNG) assembly parts for the automotive industry. The Keihin group is engaged in the manufacturing of fuel injection and air-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of ₹ 1,29,94,274/- is not an operating expenditure. b. With respect to the personnel expenditure and depreciation, allowance it was stated that the personnel expenses compared to operating revenue of the assessee is 42.5% whereas of comparables it is only 12.17%. Therefore, the difference of the above margin of ₹ 7,21,70,918/- same is not considered as operating cost. c. Similar is the case of depreciation. The average depreciation cost of comparable was stated to be 3.76% against depreciation of the assessee at 20.75%. d. Finance cost was also excluded amounting to ₹ 46,25,414/- stating that only finance cost relating to working capital loss is considered as operating expenditure. 8. The ld. Transfer Pricing Officer noted that assessee has reduced 37% of its cost as idle cost without explaining the basis with the reasoning and not submitting the evidence in support of its claim. Thus, he rejected the claim of the assessee and computed the margin of the assessee at (-) 39.65%. He further observed that the assessee company being the tested party has made capacity utilization adjustment in its own account to make it as comparable to the compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating profit at ₹ 1,73,49,793/-. The loss of the assessee of ₹ 9,43,57,340/- was reduced by the depreciation amounting to ₹ 4,93,87,578/- and adjusted loss was computed at ₹ 4,49,69,762/-. Therefore, the adjustment was made of ₹ 6,23,19,555/-. With Respect to disallowance of testing expenditure, ld. DRP held it to be Revenue expenditure. 11. Consequently, the assessment order was passed making the above adjustment. There is one more corporate adjustment of disallowance of ₹ 42,39,000/- on account of provision for doubtful debts was made. The assessee did challenge the same before the ld. Dispute Resolution Panel but same was not adjudicate. In absence of any direction, above addition was also made by the ld. Assessing Officer in the final assessment order passed under Section 143(3) read with Section 144C of the Act dated 26.10.2017 and the income of the assessee was finally assessed at loss of ₹ 3,18,14,920/- against the returned loss of ₹ 9,83,73,479/-. 12. Ground Nos. 1 and 2 of the appeal are general in nature and no further arguments were advanced thereon, hence those are dismissed. 13. Ground No. 3 is challenging the ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee should not be accepted. It was further claimed that comparable companies were existing since decades. AR further demonstrated that the average salary cost of the comparable companies is merely 13.52% of the total revenue of the comparables whereas in the case of the assessee it is 42.5%. Thus, apparently there is a higher personnel cost incurred by the assessee. 19. With respect to the higher cost of sales, assessee submitted that during the financial year 2012 - 13 the contention of imported raw material constituted 89.65% of the total raw material consumption. Whereas in case of comparable it was only 12.19% of the total Raw Material consumption on the weighted average cost of earlier three years. It was stated that the matter contention of the assessee was significantly higher than the comparables as it has incurred much higher duty cost and other imported related costs such as clearing and forwarding charges, delivery order charges, Demat charges etc. Because of severe competition in the market, assessee could not pass the import duty and other related cost to the end customer and was forced to bear the entire impact. Therefore, to improve the reliability of the result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e examined whether the assessee has claimed an ad hoc adjustment or has submitted the requisite details for claiming the above adjustment. We find it page number 310 of the paper book the assessee has submitted the complete details of the employees, part of who are also seconded by the associated enterprise to the assessee in India. The assessee has incurred the cost of such seconded employees amounting to ₹ 93,373,066/- and of its own employees of ₹ 98,908,439/-. In the seconded employees detail the assessee has shown that certain employees are for the development of the business and they are being paid higher amount of salaries looking at the other comparative salaries of the other employees. Therefore, it is apparent that assessee has not paid any ad hoc adjustment with respect to the salary payments being higher than the comparable but has given a listing of the employees, the designation, there are dictation qualification, nature of services performed by them, experience of the employees along with the details of the remuneration paid to them. Therefore, the lower authorities' observation that the same is claimed by the assessee on ad hoc basis is not correct. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re working for the development of the business and not for earning the operating profit for the year requires proper adjustment. 26. With respect to ground number 3.4 where the claim of the assessee is that the import duty adjustment carried out by the assessee on account of huge difference in import duty cost of the assessee as well as of the comparable should also be eliminated from the operating expenses of the assessee, we hold that as necessary consumption of the material is only booked in the profit and loss account for which the materials are imported for onward sale/manufacturing whose revenue has been booked in the profit and loss account, the above adjustment cannot be granted. This is so for the reason that the duty structure of the material imported by the assessee and the sale price of the assessee takes into consideration all these commercial aspects of the trading or operation of the business of the assessee. Naturally, if the import duty factor (rate) is higher when raw materials imported by the assessee naturally the sale price will reflect the recovery of those import duty also from the buyers. 27. In the result, ground number 3 of the appeal is partly allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehiin Panlafa private limited on demerger in financial year 2014 - 15 and the same is shown Under the head other liabilities in financial statements of that company. Such details were submitted on 23rd 11 2016 and 23 December 2016. The learned assessing officer has considered the amount of ₹ 4,239,000/- as excess provision which is not been added back to the income in either current assessment year or in the succeeding assessment year, hence added the same to the income of the assessee u/s. 37 of the act. The claim of the assessee is that any amount of provision for which the corresponding amount is reduced from the set-aside is of the balance sheet is treated as an actual right of he relied upon the decision of the honourable Gujarat High Court in case of CIT versus Vodafone Essar Gujarat Ltd. (TS-330-HC-2017-GUJ] was wherein it has been held that if the assessee debits an amount of doubtful debt to the profit and loss account and credits the asset account like sundry debtors account it would constitute a write off of an actual debt. Thus, the claim of the assessee is that the above sum is a bad debt only and not provision for doubtful debts. The learned authorised represent ..... X X X X Extracts X X X X X X X X Extracts X X X X
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