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Income Tax Appellate Tribunal, DELHI BENCH “I-2”, NEW DELHI
Before: SH. O. P. KANT & SMT. BEENA A. PILLAI
The present appeal has been preferred by assessee against final order dated 28.12.2016, passed by Ld. DCIT Circle-1(2), New Delhi for assessment year 2012-13 on following grounds of appeal:
1. On the facts and circumstances of the case and in law, the learned Deputy Commissioner of Income-tax, Circle-1(2), New Delhi ("AO") has erred in passing the assessment order under Section 143(3) of the Income-tax Act, 1961 ("the Act") after considering the incorrect adjustments proposed by the Assistant Commissioner of Income-tax, Transfer Pricing Officer - I(1 )(1), New Delhi ("TPO") in his appeal effect order passed in pursuance of the directions of the Hon'ble Dispute Resolution Panel ("DRP").
2. The learned TPO/AO have erred in calculation of working capital adjusted operating margin over operating cost of ICRA Management Consulting Services Ltd.
3. The learned TPO/AO have erred in following an inconsistent approach with respect to treatment of certain expenses as operating/non-operating in the case of comparables vis-a-vis the assessee while computing their operating margins respectively.
4. The learned AO erred in holding that the appellant has furnished inaccurate particulars of income in respect of each item of disallowance/additions and in initiating penalty proceedings under section 271 of the Act.
5. That on the facts and in the circumstances of the case, the Ld. AO has erred in/initiating penalty under section 271 of the Act, as consequences of the addition made in the assessment order passed under section 143(3) read with section 144 of the Act; 6. That on the facts and in the circumstances of the case, the Ld. AO has erred in charging interest under section 244A, 234B and 234D of the Act, as consequences of the additions made in the assessment order passed under section 143(3) read with section 144C of the Act.
Ld. Counsel at outset submitted that Ground No. 1 raised in memo of appeal is general in nature Ground No. 4, is premature and Ground No.5 and 6 are consequential in nature. He thus submitted that these grounds do not require any adjudication. Ld. Counsel submitted that only issue that requires adjudication is in respect of Ground No. 2 and Ground No. 3.
Brief facts of the case are as under: Assessee filed its return of income for the year under consideration on 29.11.2012 declaring a total income of Rs. 2,43,08,640/-. The case was selected for scrutiny and notice under section 143(2) of the Act was issued alongwith notice under section 142(1) of the Act alongwith questionnaire. In response to statutory notices, representatives of assessee appeared before Ld. AO from time to time to furnish submissions as required and called for. 4. Ld. DCIT observed that assessee is engaged in business of providing support services with respect to footwear and apparel manufactured in India. It was observed that as per Form 3 CEB, assessee during the year had undertaken international transactions with its associated enterprises. Ld. AO, therefore, in accordance with provisions of section 92CA of the Act, referred matter to transfer pricing officer (TPO) for determining arms length price. Ld.TPO rejected economic analysis undertaken by assessee and made adjustment amounting to Rs. 1,65,98,268/- with respect to international transactions of provision of support services as under: International Method Selected aTSPL Comparables Transaction (Tested party) Transfer Margin Type of Arm’s Within5 Price (INR) Companies Length Percent of Transfer Margin price Provision of TNMM using Companies 8.47 (2.19) 250,618,849 Support Service Operating Profit Engaged in percen percen
as t Providing similar t a PLI services Operating Cost Reimbursement No benchmarking of Expenses by required 8,907528 NA NA NA NA aTSPL Reimbursement No Benchmarking 1872458 NA NA NA NA Of Expense to required aTSPL
On the basis of directions by DRP, Ld. DCIT proposed following variations to returned income: Particulars Amount(INR Income under the head from business & 24,308,640 Profession(as per computation of income by the Assessee) Add: Difference on account of arm’s length price as 16,598,268 per order of the learned TPO Add: Difference on account of voluntary 64,321 disdallowance of professional charges in relation to lease hold improvement Less: Depreciation on amount disallowed as capital 63,584 expenditure in AY 2011-12(WDV as on 1.04.2011 of INR 635,841@10%) Total Assessed Income 40,907,645
Against adjustments made by the Ld. DCIT, assessee is in appeal before as on 2 issues which are as under: Ground No. 2: Before us assessee is aggrieved with the method of computation of working capital adjustment in case of M/s ICRA Management Consulting Services Pvt. Ltd., being one of comparables finalized by Ld. TPO. Ld. Counsel submitted that rectification application under section 154 of the Act was filed before Ld. DCIT which was disposed of vide order dated 02.02.2017, without granting any relief to assessee. Ld. Counsel submitted that, in the financial report of M/s ICRA Management Consulting Services Pvt. Ltd. trade receivables for the year under consideration as on 31.03.12 was 785.19 lakhs and in the preceding year it was 820.80 lakhs. He placed his reliance upon Schedule 8 in the financials of M/s ICRA , placed at page 420 of paper book which is reproduced herein: 8. Trade receivables (unsecured) over 6 months -considered good due from companies under the 26.28 0.0 same management -Considered good due from others 381.74 389.99 -Considered doubtful 68.35 72.46 476.37 462.45 Others -Considered good due from companies under the 74.12 0.0 same management -Considered good due from others 711.07 820.80 785.19 820.00 Total 1, 261.66 1, 283.25 Less provision for doubtful debts (88.35) (72.46)
Ld. Counsel submitted that by excluding the provision for doubtful debts, working capital adjustment of this comparable has been computed at 6.62% by Ld. TPO. He submitted that Ld. TPO, while calculating working capital adjustment has taken trade receivables at nil, because of which OP/OC comes to 6.62%. The computation of working capital as per Ld.TPO is reproduced herein: O. Ave Total Total Avera Avera Origi S. Compa Tota P. rag workin worki Adjus Sale ge ge Differ Inte nal N ny l Pr e g ng tmen s Inven Recei ence rest OP/ o. name Cost ofi Pay capit Capita t tor vable OC t able al l/Cost A B C= D E F G=D+ J=I/C K=J( L M=K N A+ E-F t)- *L B J(c) 1 I C R A Manage ment 22. 24.1 1.49 0.4 4.42 12. 0.56 6.6 Consulti 638 . . (0.49) 2.6% 378 89 90 % 60% % 2% ng 9 Services Ltd.
Ld. Counsel submitted that DRP had accepted contention of assessee and had directed TPO to allow working capital by observing as under: “The TPO is directed to allow working capital adjustment. However, for this purpose, the DRP East of the view that the average of opening and closing balance of the inventory and of trade receivables/VFL, trade debtors/creditors, for the relevant year may be adopted which may broadly give their representative level of working capital over the year. Even if there is some difference with respect to the representative level, it will not affect the compatibility at the same method will be applied to all cases. Same is the case with segmental data.”
Ld. Counsel submitted that TPO did not provide any reason for not computing working capital margin of M/s ICRA Management Consulting Services Pvt. Ltd., as per direction of DRP. He thus requested to direct Ld. TPO to rectify error in computation of working capital adjusted margin of M/s ICRA Management Consulting Services Pvt. Ltd.
Ld. CIT DR agrees with the submissions advanced by Ld. counsel regarding the oversight that has crept in the computation of working capital margin. Ld. CIT (DR) submitted that for the purposes of working capital margin of M/s ICRA Management Consulting Services Pvt. Ltd., the issue may be set aside to Ld. TPO for consideration as per direction of DRP. 11. We have perused submissions advanced by both sides in the light of records placed before us. 12. It is observed from order passed by Ld. TPO that while computing working capital adjustment, margin in the case of M/s ICRA Management Consulting Services Pvt. Ltd., has attributed receipts, in the column of average receivables, which disturbed entire calculation. From the financial of M/s ICRA Management Consulting Services Pvt. Ltd., placed in the paper book (the computation has been reproduced hereinabove) it is observed that there are sufficient trade receivables during the year under consideration. It has been submitted by Ld. Counsel that all these details were before Ld. TPO during assessment proceedings and again during the rectification proceedings under section 154 of the Act. 13. Under such circumstances, and in the interest of natural justice, we are of the considered opinion that these figures needs to be considered while deriving working capital adjustment of M/s. ICRA Management Consulting Services Pvt. Ltd., Accordingly, we set aside this issue to file of Ld. TPO for re-computing working capital adjustment in the light of financial report of M/s. ICRA Management Consulting Services Pvt. Ltd., placed in paper book at page 420. In the result this ground raised
by assessee stands allowed for statistical purposes. Ground No. 3
14. Ld. Counsel submitted that Ld. TPO computed net operating margins of two comparable companies, by excluding provision of doubtful debts from operating expenses, the details of which are as under: Name of company Position taken by TPO’s while Margin computed computing operating margin by TPO in appeal effect order BVG India Limited Provision for doubtful debts are 23.59% considered to be non-operating Cameo Corporate Provision for doubtful debts are 4.10% Services Limited considered to be non-operating
Ld. Counsel referred to computation adopted by Ld.TPO, in the draft order, which has been reproduced hereinbelow: Revenue from operations 5,658,035,427 Add: other income 25, 262, 980 Total income 5,683,298,407 Less nonoperational 25, 262, 980 income Interest on fixed deposits, 24,201,060 current investments Surplus on disposal, 371,923 BVG India Ltd., discard, demolish mint and destruction of different shareable
tangible assets Miscellaneous and other 698, 997 operating income Operating income 5,658,035,427 Total 4,799,337,996 expenditure Less: non operational 253,428,930 expenses Interest costs 215,822, 284 Provision for bad doubtful 37, 606, 646 debts created Operating cost 4,545,909,066 Operating profit 1,112,126,361 Operating 24.46% profit/operating cost (%) Operating 19.66% profit/operating revenue (%)
Revenue from operations 792, 039, 600 Add: other income 9, 170, 165 Total income 801, 209, 765 Less: non operational 9, 170, 165 income Interest Income 692, 514 Rental income 8, 164, 873 Exchange gain/loss 312, 778 Cameo Operating income 792, 039, 600 Corporate Total 769, 525,957 Services Ltd expenditure Less: non operational 36, 034, 062 expenses
Interest and financial 32, 966, 458 charges Provision for bad & 3, 067, 604 doubtful debts Operating cost 733,491, 895 Operating profit 58, 547, 705 Operating 7.98% profit/operating cost (%) Operating 7.39% profit/operating revenue (%)
Whereas, Ld. Counsel submitted that after DRP directions, while computing assessee’s operating profits, Ld.TPO considered provision for bad debts as operating expenses. He relied upon computation placed at page 401 of paper book read with, break up of other expenses, being schedule 19, forming part of Notes to the financial statements at page 33 of paper book, which is reproduced hereinbelow: Computation of operating profits in assessee’s case(pg.401): Particulars PO’s order/Appeal Effect to DRP Income Service Charges 25, 06, 18, 849 Other income 8, 66, 214 Total income 25, 14, 85, 063 Less:non-operating income Less: provision is no longer required 8, 55, 809 written back Operating income 25, 06, 29, 254 Expenditure Personal expenses 14, 08, 60, 742 Operating and other expenses 8, 45, 68, 080 Depreciation 1, 52, 99, 083 Total expenditure 24, 07, 27, 904 Less: non-operating expenses Less: loss on sale of fixed assets 20, 961 Less: forex loss 54, 09, 312 Operating costs 23, 52, 97, 631 Operating profit 1, 53, 31, 623 Adidas technical services private limited Notes to the financial statements (All amounts in rupees, unless otherwise stated) 19. Other expenses For the For the year year ended ended 31 31 arch arch 2011 2012 Rs. Rs. Travelling and conveyance 24, 482, 876 24, 220, 797 Repair and maintenance 7, 389, 450 7, 006, 990 Power and fuel [includes prior period expenses of 780, 099 354, 899 Rs.144,612(previous year rupees nail)] Rent 24, 86, 941 27, 616, 133 Rates and taxes 434, 224 618, 291 Insurance 3, 268, 816 2, 549, 335 Inspection fees 293, 839 144, 110 Auditors remuneration (refer note 24) 1, 044, 330 849, 310 Legal and professional charges [includes prior period 2, 537, 365 2, 850, 075 expenses of Rs.41,545 (previous year rupees nail)] Communication 6, 913, 387 7, 572, 719 Printing and stationary 1, 211, 960 1, 071, 921 Relocation expenses 806, 245 1, 473, 099 Entertainment 84, 250 - Bank charges 87, 920 54, 358 Brokerage 115, 300 5000 Net loss on foreign exchange fluctuation [includes 5, 409, 312 585, 159 prior period expenses of Rs.3,351,265(previous year rupees nail)] Net loss on seal/retirement of fixed assets 20, 961 - Advance written off 59, 396 Provision for doubtful advances 3, 815, 829 Miscellaneous expenses [includes prior period 476, 361 632, 781 expenses of Rs.19,744 (previous year rupees nail)] 84,568,081 77,648,624
Ld. Counsel submitted that DRP in its directions directed Ld.TPO to consider consistent approach, while considering expenses as operating/non-operating in the case of both assessee as well as comparable companies, which has not been followed by Ld.TPO.
On the contrary, Ld. CIT (DR) submitted that, Ld.TPO did not consider provision for doubtful debts in the case of these 2 comparables as, it has appeared in the financials of these companies for the first time in the year under consideration. He submitted that Ld.TPO compared financials of these comparables with that of preceding 3 years financials, based on which Ld.TPO excluded provision for doubtful debts from being included as operating expenses, and treating it as extraordinary. He relied upon the orders of Ld. TPO. 19. We have perused submissions advanced by both sides in the light of records placed before us. It is observed that Ld. TPO excluded provision for doubtful debts in the case of BVG India Ltd and Cameo Corporate Services Ltd., based on financials for preceding 3 years. It is observed that, according to Ld. TPO, ‘provision for doubtful debts’ has appeared for the first time the financial for the year under consideration which is due to extraordinary event. If that so, Ld. TPO should have excluded these comparables from final list for the purposes of computing PLI. However, he chose to only exclude provision for doubtful debts, by treating it as extraordinary. We do not agree with such comparison by Ld.TPO. Ld. Counsel had relied upon decision of coordinate bench passed in the case of Techbooks International Pvt. Ltd., vs DCIT in for assessment year 2010-11. This Tribunal vide order dated 06.07.15 has observed as under: “6.2. Both the provision for bad debts as well as doubtful advances are in the realm of operations of the business. It is not the case of either side that assessee made in excess provision. In our considered opinion the same has been rightly taken as an item of operating expense of the assessee. The TPO is directed to treat the amount of provision for doubtful debts/advances as operating in the case of the comparables as well.”
To the facts of the present case also the revenue has not disputed the provision of doubtful debts being excessive in the hands of the assessee for the year under consideration. It is also observed that the DRP had directed Ld.TPO to have consistent treatment in terms of items includable/excludable in non-operative profit, with assessee as well as with comparables which evidently has not been followed by Ld. TPO. Respectfully following the view taken by this Tribunal in the case of Techbooks International Pvt. Ltd., vs DCIT, we direct Ld. TPO to treat provision of doubtful debts in the case of BVG India Ltd and Cameo Corporate Services Ltd., as operating as well. Accordingly, this ground raised by assessee stands allowed. In the result appeal filed by assessee stands allowed. Order pronounced in the open court on 18th May, 2017.