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Income Tax Appellate Tribunal, DELHI BENCH ‘C’, NEW DELHI
Before: SHRI N. K. SAINI & SMT. BEENA A. PILLAI
Date of hearing: 02.08.2016 Date of Pronouncement: 26.08.2016 ORDER
PER BEENA A. PILLAI, JM:
The present appeal has been preferred by the revenue against the order dated 29/10/2010 passed by Ld. CIT (A) 20, New Delhi for assessment year 2003-04 on the following grounds of appeal:
“1) The Ld.C1T(A) erred in law as well as on the facts and circumstances of the case, in deleting the addition of Rs.44,52,550/- made by AO on account of provision for doubtful debts and advances". 2) The Ld.CIT(A) erred in law as well as on the facts and circumstances of the case in deleting the addition or Rs. I 5074722/- being difference in the arm's length price in the value of the International Transaction. The AO made this addition on the basis
2 I.T.A.No.100/Del/2011 on PO's order passed u/s 92C.1\(3) of the Income Tax Act. 3.1 "The Ld.CIT(A) erred in law as well as on the fact and circumstances of the ca e. b) reducing the cost base of the assessee as determined by the TPO." 3.2 "The Ld. CIT(A) erred in law as well as on the facts and circumstances of the case. in disturbing the cost base as directed by the TPO without assigning any reason thereof.” 3.3. "The Ld.CIT(A) erred in law as well as on the facts and circumstances of the case, in agreeing for partial inclusion of clearing charges and foreign exchange loss and excluding expenses such as repair and maintenance, electricity. insurance and depreciation on other a sets. 4.1 "The Ld.CIT(A) erred in law as well as on the facts and circumstances of the case by excluding two comparable companies i.e. M/s. Punit Commercial Ltd. and M/s. Goldiam International Ltd. without assigning any reason thereof." 4.2. "The Ld.CIT(A) erred in law as well as on the facts and circumstances of the case will excluding high margin comparables without considering negative margin and low margin comparables also and further erred in excluding comparables selected by the assessee itself. 4.3 "The Ld. CIT(A) erred in law as well as on the facts and circumstances of the case, in not considering the concept of average mean margin wherein all comparable are considered."
The brief facts of the case are as under:
2.1 The assessee filed its return of income declaring a loss of Rs. (-) 8,55,86,879/- on 27/11/2003, which was processed under section 143 (1) of the Act. The case was 3 I.T.A.No.100/Del/2011 selected for scrutiny and notice under section 143 (2) was issued.
2.2 The Ld. A. O. during the assessment proceedings observed that the assessee had made provision for doubtful debts and doubtful advances amounting to Rs.44,52,550/-. These alleged debts and advances were doubtful of recovery and therefore it was written off as irrecoverable, in the accounts of the assessee. Ld. AO disallowed the said provision by holding that section 36 (1) (vii) mandates that the amount of any debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year could only be deducted while computing the income of the assessee company and the assessee has no where mentioned that it has written of the said amount in the books of account during the year under consideration.
Aggrieved by the order of the Ld. A.O., the assessee preferred an appeal before the Ld. CIT (A). The Ld. CIT (A) deleted the disallowance by relying upon the decision of Hon’ble Supreme Court in the case of Vijay bank versus CIT and Anr., reported in (2010) 323 ITR 166.
Aggrieved by the order of the Ld. CIT (A) the revenue is in appeal before us now.
Ld. D.R. submitted that the assessee has not squared up the individual creditors account though the amount has been provided for in the balance sheet for the 4 I.T.A.No.100/Del/2011 year under consideration. The Ld. DR submitted that as the individual account has not been written off and the assessee has not complied with the requirements for the deduction to be allowed under section 36 (1) (vii) of the Act. He submitted that Hon’ble Supreme Court in the case of TRF Ltd. reported in 323 ITR 397, has expressed the requirement of the individual account to be written off for the provision to be qualified for the deduction under section 36 (1) (vii) of the Act. He submitted that the decision of Hon’ble Supreme Court in the case of Vijaya bank Vs. CIT and Anr., (supra) has been passed before the decision in the case of TRF Ltd. He thus submitted that the decision of TRF Ltd. being recent, must be followed as the facts therein are similar to that of the case of assessee.
On the contrary, the Ld. A.R. submitted that the decision of Hon’ble Supreme Court in the case of TRF Ltd., has been set aside to the Ld. A.O. for verification. He placed his reliance upon the decision of Hon’ble Supreme Court in the case of Vijaya bank versus CIT and Anr., (supra) which has been followed subsequently by Hon'ble Supreme Court, various High Courts and Coordinate benches of this Tribunal. He submitted that it is a settled law as far as principles relating to writing off of debts are concerned.
The Ld. A.R. further submitted that the assessee during the relevant previous year has made provision for doubtful
5 I.T.A.No.100/Del/2011 debts and provision for doubtful advances. He submitted that these debts and advances were doubtful of recovery, which were identified by the assessee and duly provided for in the books of accounts by debiting to profit and loss account and the same has been shown reduced from the amount of debtors and advances shown under the head current assets appearing in the audited balance sheet for the respective year (relevant pages 20, 24, 27 of the paper book). He placed his reliance upon the relevant para of the decision of Hon’ble Supreme Court in the case of Vijaya bank Vs. CIT and Anr., (supra), which is as under:
“BAD DEBT - WRITING OFF - LAW AFTER APRIL 1, 1989 - MERE DEBIT TO PROFIT AND LOSS ACCOUNT NOT SUFFICIENT-SIMULTANEOUS OBLITERA- TION OF PROVISION FROM ACCOUNTS BY REDUCTION FROM "LOANS AND ADVANCES" OR "DEBTORS" ON ASSETS SIDE OF BALANCE-SHEET-AMOUNTS TO WRITING OFF FOR GRANT OF DEDUCTION - DISALLOWANCE FOR FAILURE TO CLOSE INDIVIDUAL ACCOUNT OF EACH DEBTOR IN ACCOUNT BOOKS- NOT JUSTIFIED-PROVISIONS APPLY TO BANKING AS WELL AS NON-BANKING ASSESSE.ES- INCOME-TAX ACT, 1961, SS. 36(1)(vii), 41(4). BUSINESS INCOME-DEEMED PROFITS-DEDUCTION ALLOWED - PART RECOVERY LATER OF DEDUCTION ALLOWED-INCOME-TAX ACT, 1961, s. 41(4). Section 36(1)(vii) of the Income-tax Act, 1961, dealing with allowance of bad debts written off by the assessee, covers banking as well as non-banking assessees. After April 1, 1989, a mere provision for bad debt will not be entitled to deduction under section 36(1)(vii). If 6 I.T.A.No.100/Del/2011 an assessee debits an amount of doubtful debt to the profit and loss account and credits the assets account like sundry debtors account that would constitute a write off of an actual debt. However, if an assessee debits provision for doubtful debts to the profit and loss account and makes a corresponding credit to the "current liabilities and provisions" on the liabilities side of the balance-sheet, then it would constitute a provision for doubtful debt. In the latter case, the assessee would no) be entitled to deduction after April 1, 1989. SOUTHERN TECHNOLOGIES LTD. v. JOINT (IT [2010] 320 ITR 577 (SC) followed. Though a mere debit to the profit and loss account would constitute a provision for a bad and doubtful debt, yet that would not constitute actual write off But where, besides debiting the profit and loss creating a provision for bad and doubtful debt, the assessee has correspondingly/simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from loans and advances/debtors on the assets side of the balance- sheet, and, consequently at the end of the year, the figure in the loans and advances or the debtors on the assets side of the balance-sheet is shown as net of the provision for "impugned bad debt", the assessee will be entitled to the benefit of deduction under section 36(1)(vii), as there is an actual write off by the assessee in his books. Disallowance cannot be made on an apprehension that in the assessee failed to close each and even individual account of its debtor, it may result in the assessee claiming deduction twice over. Held, on the facts, that the assessee was entitled to the deduction claimed because: (i) the head office accounts of the assessee clearly indicated that on re- payment in subsequent years the amounts were duly offered for tax; (ii) that wider accountancy practice the accounts of the rural branches had to tally with the 7 I.T.A.No.100/Del/2011 accounts of the head office, and if the amount repaid in subsequent years is not credited to the profit and loss account of the head office and if the repaid amount in subsequent years is not credited to the profit and loss account of the head office, which was what mattered ultimately, then there would be a mismatch between the rural branch accounts and the head office accounts; (iii) in any event under section 41(4), where deduction had been allowed in respect of a bad debt or a part thereof under section 36(1)(vii) then if the amount subsequently recovered on any such debt is greater than the difference between the debt and the amount so allowed, the excess is deemed to be profits and gains of business, and accordingly chargeable to tax as the income of the previous year in which it is recovered; and the Income-tax Officer is sufficiently empowered to tax such-subsequent repayments under section 41(4).”
We have perused the relevant records, the orders passed by the authorities below and the judgements relied upon by both the sides. We agree with submissions made by the Ld. A.R. that the issue whether the provision as provided for by the assessee is debited to the profit and loss account should be allowed as deduction under section 36 (1) (vii) in spite of the fact that the individual debtors account has not been written off as settled by the Hon’ble Supreme Court in the case of Vijaya bank versus CIT and Anr. (supra). We therefore, do not find any infirmity in the order of the Ld. CIT (A) in deleting the disallowance made by the Ld. AO.
8.1 Accordingly ground No. 1 raised by the revenue stands dismissed.
8 I.T.A.No.100/Del/2011
As regarding the transfer pricing adjustments the facts are as under:
9.1 Assessee is a globally famous brand for Crystal and Crystal related products. It is a wholly owned subsidiary of Swarovski international Holdings AG (F I H) during the year under consideration assessee was 100% EOU in Pune and was engaged in job work coating raw beads and polishing the sale to its AE’s amounting to Rs.57,598,485/-. The assessee had country sales office with Crystal component division and consumer goods division in New Delhi. The sales activity commenced from November 2000. The domestic units at New Delhi was carrying out the activity of import and sale of Crystal and Crystal related products. The major customers of consumer goods division and Crystal component divisions are designers, garment manufacturers etc. During the year under consideration assessee distributed finished crystals and Crystal related product supplied by its AE to the customers. Assessee was the sole distributor of its AE in India.
9.2 The international transaction entered into by the assessee for the year under consideration are as under:
S.N. International Transaction Method Value (Rs.) 1 Import of crystal and crystal CUP 58,417,145 components 2 Purchase of plant and machinery Cost Plus 29,24,725
9 I.T.A.No.100/Del/2011 3 Coating of raw beads Cost Plus 57,598,485 4 Commission received CUP 28,64,459 5 ECB loan CUP 59,60,300 6 Provision of EDP procurement & CUP 30,72,651 support services 7 Purchase of chemicals and other Cost Plus 7,84,646 consumables 8 Import of communication materials Cost Plus 58,28,599 9 Reimbursement of Training Cost Plus 3,59,118 expenses 9.3 There is no dispute with respect to the determination of Arm’s Length Price in respect of the International Transactions with its AE on Coating of Raw Beeds. Assessee chose cost plus method as the most appropriate method for the purposes of determination of arm’s length price of the international transaction pertaining to the activity of purchase of consumables and job work charges received and the assessee calculated a gross markup of 120.94% on the direct and indirect processing cost. The Ld. TPO recomputed the cost base by taking certain overhead expenses such as repairs and maintenance, electricity, insurance and depreciation as a part of the indirect cost of production for the purposes of CPM analysis which is as under:
Costs incurred in proving job work services Rs.4,39,99,036/-
10 I.T.A.No.100/Del/2011
Arm’s Length Price (costs plus 65.17%) Rs.7,26,73,207/- Amount received Rs.5,75,98,485/- Difference with ALP in Rs. And in % Rs.1,50,74,722/- (26%) 9.4 In the transfer pricing documentation filed by the assessee the assessee had listed 19 comparable companies engaged in similar business as that of the assessee. The ld.TPO excluded 2 comparable companies being M/s. Punit commercial Ltd. and M/s. Goldiam International Ltd. for the reason that these were having high margin as compared to that of the assessee, which could not be verified by the Ld. TPO due to in availability of the data.
9.5 Aggrieved by the order of the ld. TPO the assessee preferred an appeal before the Ld. CIT (A). The Ld. CIT (A) agreed with the contentions of the assessee and deleted the adjustments made in respect of the cost base and excluded the expenses like repair and maintenance, electricity, insurance and depreciation, which was not directly connected with the international transaction entered into by the assessee with its AE.
9.6 In respect of the abnormal gross markup in case of the 2 comparable companies, the Ld. CIT(A) recomputed the same due to the availability of the annual report on the public domain by then, which was not available at the time of preparing the TP report. The Ld. CIT (A) calculated
11 I.T.A.No.100/Del/2011 the average gross markup over cost at 15.17% and computed the arms length price as under:
Costs base as taken by TPO Rs.4,39,99,036/- Arm’s Length Price (cost plus 15.17%) Rs.5,06,73,690/- Amount received Rs.5,75,98,485/- 9.7 Aggrieved by the order of the Ld. CIT (A) the revenue is in appeal before us now.
9.8 The Ld. DR submitted that assessee maintained separate accounts for its Pune and Delhi units. He submitted that Pune unit is a contract manufacturing unit and Delhi unit takes care of distribution of Crystal goods. The Ld. D R submitted that as per the segmental accounts annexed with the return of income the total cost incurred by the Pune job work unit is Rs.64,444,4087/- and in the transfer pricing analyses, the total cost have been declared at Rs.49,233,609/- only. He thus submitted that the assessee has distributed the cost of Pune unit over various activities that is coating of raw beeds, trading, transfer etc. Ld. DR submitted that there is no rational given the aforesaid allocation of expenses of Pune unit and therefore, the cost base calculated by the Ld. TPO has to be upheld in respect of determination of arms length price of the ld.TPO rejected to companies with abnormal high gross profit margin which was included by the assessee in its TP study. He submitted that the Ld. CIT(A) has not given proper reasoning for including the 2
12 I.T.A.No.100/Del/2011 comparables for the purposes of determining the arms length price. Ld. DR placed his reliance upon the decision of Hon’ble Delhi High Court in the case of Chrys Capital Investment Advisers (India) (P) Ltd vs. DCIT, reported in (2015) 56 Taxmann.com 417, wherein it has been held that;
“…… mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from list of comparables for the purposes of determination of a LP as in such circumstances and enquiry under rule 10 B (3) ought to be carried out to data mine as to whether material differences between the assessee and the said entity can be eliminated and unless such differences cannot be eliminated, entity has to be included as a comparable.” 9.9 On the contrary the Ld. AR referred to and relied upon the findings given by the Ld. CIT (A). He submitted that as per rule 10 B, the cost base should include the direct and indirect cost of production of goods and services which the assessee has duly considered while working out the cost base. The ld.AR further submitted that in respect of the overheads at Pune, assessee has allocated part of the overhead expenses to the quoting activity, and cost base has been calculated. Ld. AR submitted that the Ld. TPO on the other hand added 100% of the amount of some of the overheads in the cost base which is not in accordance with the said rules.
9.10 Regarding abnormal gross profit markups the ld.AR submitted that the Ld. TPO has not followed rule 10 B. He
13 I.T.A.No.100/Del/2011 submitted that gross profit markup over cost of 19 comparable showing average gross markup 15.71% was submitted before the Ld. TPO and the Ld. TPO has taken gross profit markup of 17 companies for FY 2002-03 which includes abnormal, gross but profit markup of 374% and 630% in case of 2 companies which are highly abnormal and should have been excluded while calculating the average gross margin over cost in case of the comparable companies. The ld. DR further submitted that the TPO excluded 2 comparable companies from the calculation as their financials were not available for FY 2002-03.
9.11 Ld. AR submitted that the ld. TPO has wrongly considered the gross profit markup of Goldiam International Ltd. and Punit Commercials Ltd. He referred to the annual accounts placed on record before as, wherein the gross profit markup over cost has been worked out to be 16.83% and 11.79% respectively. He submitted that in the event these comparables are included, correct margin as derived from the annual reports may be taken.
We have perused the orders of the authorities below and the paper book filed by the assessee. It is observed that the assessee has not objected to the inclusion of the clearing charges foreign exchange fluctuation loss and certain indirect and direct cost of production in the cost base. The assessee has objected to the inclusion of 14 I.T.A.No.100/Del/2011 expenses like other repair and maintenance, electricity, insurance and depreciation on the other assets being overhead expenses in the cost base for calculating grass markup over cost. We agree with the submissions made by the Ld. AR that while calculating the cost base over cost as per rule 10 B, expenses directly related to the production and distribution of beads activity must only be considered. It is observed that the other expenses included by the Ld. TPO being electricity, insurance and depreciation etc cannot be considered to be directly related to the production and distribution of the beads activity. We therefore, do not find any infirmity with the findings of the Ld. CIT (A) in determining the cost base by considering those expenses which could be directly linked with the production and distribution activity of the assessee for its AE.
10.1 Regarding the submissions advanced by both the parties relating to the inclusion/exclusion of the 2 comparables being Goldiam International Ltd. and Punit Commercials Ltd, is it is observed that the annual report submitted by the assessee, was not available on the database at the time of TP proceedings. The plea advanced by the Ld. AR is that, in the event these companies are included then the correct margin as per the annual accounts must be considered. We accordingly set aside these to the Ld. TPO for verification of the data provided in 15 I.T.A.No.100/Del/2011 the annual accounts of these 2 companies and to calculate the gross margin by using the correct figures.
10.2 Accordingly ground No. 2 to 3.3 stands dismissed and ground No. 4.1 to 4.3 stands allowed for statistical purposes in the appeal filed by the revenue.
In the result the appeal filed by the revenue stands disposed off accordingly.
Order pronounced in the open court on 26th Aug., 2016.