2013 (5) TMI 70 - AT - Income Tax

Tribunal directs fresh adjudication on transfer pricing and bad debt claims, finds errors in TNMM method

Givaudan Flavours (India) (P.) Ltd. Versus Deputy Commissioner of Income-tax – 1(3), Mumbai

The Tribunal allowed the appeal for statistical purposes, directing a fresh adjudication on both the transfer pricing adjustment and the claim of bad debt ... Transfer pricing adjustment -assessee had international transactions with 10 associate enterprises (AEs) which included import of raw material – The AO therefore, following report of TPO and after giving opportunity of hearing to the assessee made adjustment on account of purchases from associate enterprises. Held that - The Tribunal also referred to the decision of the Tribunal in case of Addl. CIT v. Tej Diam [2010 (1) TMI 806 – ITAT, Mumbai] in which it has been held that TNMM method required comparison of net profit margin realized from international transactions or aggregate of international transactions and not comparison of operating margins of the enterprises. The Tribunal therefore restored the issue to the file of AO for fresh adjudication in accordance with law. The facts this year admittedly are identical. Therefore we set aside the order of CIT(A) and restore the matter back to the file of AO for passing a fresh order. Allowability of claim of bad debt - assessee had not made claim in the return of income but the claim was made during the course of assessment proceedings – Held that - Since the factual aspects regarding fulfillment of condition for allowability of bad debt claim have not been examined, we restore the issue to the file of AO for adjudicating the same after examination of records and after allowing opportunity of hearing to the assessee. Issues:1. Transfer pricing adjustment2. Allowability of claim of bad debtTransfer Pricing Adjustment:The appeal was against the CIT(A)'s order for the assessment year 2007-08, concerning transfer pricing adjustment and the claim of bad debt. The AO noted international transactions with 10 associate enterprises, leading to a referral to the TPO for determining arms length price. The TPO requested information supporting ALP, and the assessee conducted a TP study using the TNMM method. The TPO excluded certain comparables selected by the assessee, computed ALP based on nine comparables, and proposed an adjustment of Rs. 11,42,21,880. The CIT(A) confirmed the adjustment, citing a previous Tribunal decision. The Tribunal, considering a similar issue in the past, found the application of enterprise level margin to international transactions incorrect, as per the TNMM method requirements. The matter was sent back to the AO for fresh adjudication in accordance with the law.Allowability of Claim of Bad Debt:The dispute revolved around the claim of bad debt amounting to Rs. 40,04,230. The claim was not made in the return of income but during the assessment proceedings. The AO did not consider the claim, and the CIT(A) upheld this decision, citing the need for claims to be made through a revised return as per a Supreme Court judgment. However, the Tribunal noted that the Supreme Court judgment applied to the AO, not the appellate authority. As the facts regarding the claim were on record, the Tribunal admitted the claim and sent the issue back to the AO for further examination after allowing an opportunity for the assessee to be heard.In conclusion, the Tribunal allowed the appeal for statistical purposes, directing a fresh adjudication on both the transfer pricing adjustment and the claim of bad debt in accordance with the law and after providing the assessee with an opportunity to present their case.