2019 (3) TMI 401 - AT - Income Tax

Tribunal adjusts transfer pricing, cancels penalty for income concealment, upholds deletion of disallowed bad debts.

The Tribunal partially allowed the assessee's appeal by excluding SISCO from comparables and adjusting the arm's length price. It upheld the deletion of ... Transfer pricing adjustment - selection of comparables - election of comparables by the TPO whose results are not available in the public domain - HELD THAT:- As rightly held by the CIT(Appeals) in this regard, the restriction stipulated in Rule 10D is applicable only to the auditor and not to the TPO, who has an inherent power to make enquiry and collect and use the information and material, which is found to be relevant for the purpose of transfer pricing analysis in order to determine the arm's length price of the relevant international transactions between the AEs. He has also discussed and relied upon various judicial pronouncements, which support this view. We, therefore, find no merit in Ground No. 1 of the assessee's appeal and dismiss the same. Exclusion of comparable - Not functionaly similar - Selection of M/s. South India Surgical Co. Limited (SISCO) as comparable by the TPO - HELD THAT:- catalogue was filed by the assessee before the ld. CIT(Appeals) under letter dated 24.12.2005 and although the ld. D.R. has contended that this general catalogue cannot conclusively establish the manufacturing activity of SISCO, we are of the view that the same coupled with the other relevant details reflected in the financial statements and annual report of SISCO are sufficient to establish that the SISCO was engaged in manufacturing also as a significant activity and in the absence of segmental details, the same cannot be taken as comparable to the assessee-company, which is mainly engaged in trading activity. We accordingly direct the TPO to exclude SISCO from the list of final comparables and allow Ground No. 2 of the assessee's appeal. We accordingly direct the AO/TPO to re-compute the arm's length price of the international transactions of the assessee-company with its AE by excluding SISCO from the list of final comparables and if the same is found to be within the tolerance limit of 5%, the AO/TPO is directed to delete the addition made on account of transfer pricing adjustment. Addition of bad debts written off - claim disallowed by AO on the ground that there was a failure on the part of the assessee to establish that the relevant debts had actually become bad and irrecoverable during the year under consideration - HELD THAT:- The assessee's appeal now stands squarely covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of TRF Limited [2013 (10) TMI 1316 - SUPREME COURT] wherein it was held that the legal position relating to the allowability of bad debts written off has changed after the amendment made by the Direct Taxes laws (Amendment) Act, 1987 in section 36(1)(vii) with effect from 01.04.1989 and it is no more necessary for the assessee to establish that the debt, in fact, has become irrecoverable. As further held by the Hon'ble Supreme Court, it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. Respectfully following the said decision of the Hon'ble Apex Court, we delete the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of assessee's claim for deduction on account of bad debts written off. Disallowance on account of interest paid on capital borrowings - HELD THAT:- In the present case, the borrowed funds having been utilized by the assessee-company for acquiring a going concern and the profits from the business of the said concern having been offered to tax in the year under consideration, we find ourselves in agreement with the CIT(Appeals) that the borrowed funds were utilized by the assessee-company for the purpose of its business and interest paid thereon was eligible for deduction u/s 36(1)(iii) as applicable to the year under consideration. We accordingly uphold the impugned order of the CIT(Appeals) on this issue and dismiss Ground No. 2 of the Revenue's appeal. Penalty u/s 271(1)(c) - transfer pricing adjustment Quantum addition deleted - HELD THAT:- we agree with the reasons given by the ld. CIT(Appeals) for cancelling the penalty imposed by the Assessing Officer u/s 271(1)(c) in respect of addition made on account of transfer pricing adjustment, it is pertinent to note that even the addition made on account of transfer pricing adjustment to the extent of ₹ 2,60,32,000/- as sustained by the ld. CIT(Appeals) is found to be not sustainable by us while disposing of the quantum appeals as held in the foregoing portion of this order. Consequently the penalty imposed u/s 271(1)(c) in respect of the said addition is not sustainable and the impugned order of the ld. CIT(Appeals) cancelling the penalty imposed by the Assessing Officer deserves to be upheld on this ground also. Issues Involved:1. Transfer pricing adjustment and selection of comparable entities.2. Treatment of foreign exchange fluctuation loss.3. Use of multiple-year data for computing operating profit margin.4. Application of +/-5% range in transfer pricing.5. Disallowance of bad debts written off.6. Disallowance of interest paid on capital borrowings.7. Imposition of penalty under section 271(1)(c).Issue-wise Detailed Analysis:1. Transfer Pricing Adjustment and Selection of Comparable Entities:The main issue in the cross appeals was the addition of Rs. 6,06,06,000/- made by the Assessing Officer (AO) on account of transfer pricing adjustment, which was reduced to Rs. 2,60,32,000/- by the CIT(A). The assessee, a 100% subsidiary of Philips Medical Systems International BV, had entered into several international transactions with its Associated Enterprises (AEs). The AO referred the matter to the Transfer Pricing Officer (TPO) under section 92CA(3) of the Income Tax Act, 1961. The TPO found errors in the assessee's calculations and rejected the comparables selected by the assessee. The TPO selected new comparables and proposed an adjustment of Rs. 6,06,06,000/-. The CIT(A) partially accepted the assessee's comparables and reduced the adjustment to Rs. 2,60,32,000/-. The Tribunal directed the TPO to exclude South India Surgical Co. Ltd. (SISCO) from the list of comparables due to functional dissimilarity and to re-compute the arm's length price. If the revised price fell within the tolerance limit of 5%, the addition was to be deleted.2. Treatment of Foreign Exchange Fluctuation Loss:The assessee argued that the foreign exchange fluctuation loss should be considered an abnormal item and excluded from operating costs. However, the CIT(A) rejected this claim, stating that the loss was incidental and part of the business activity. The Tribunal upheld this view, noting that the loss was a normal business expense and integral to the profit calculation.3. Use of Multiple-Year Data for Computing Operating Profit Margin:The assessee contended that multiple-year data should be used for computing the operating profit margin of comparables. The CIT(A) and the Tribunal rejected this argument, stating that for the relevant assessment year, there was no error in considering single-year data only.4. Application of +/-5% Range in Transfer Pricing:The assessee sought the benefit of the +/-5% range while computing the arm's length price. The Tribunal directed the AO/TPO to re-compute the arm's length price by excluding SISCO from the list of comparables. If the revised price fell within the 5% tolerance limit, the addition was to be deleted.5. Disallowance of Bad Debts Written Off:The AO disallowed the assessee's claim for bad debts written off, stating that the assessee failed to establish that the debts had become irrecoverable. The CIT(A) upheld this disallowance. However, the Tribunal, citing the Supreme Court's decision in TRF Limited, held that it was sufficient for the bad debt to be written off as irrecoverable in the accounts. The Tribunal deleted the disallowance.6. Disallowance of Interest Paid on Capital Borrowings:The AO disallowed interest paid on borrowed funds used to acquire a new business, considering it a capital expenditure. The CIT(A) deleted the disallowance, noting that the borrowed funds were used for business purposes and the profits from the acquired business were offered to tax. The Tribunal upheld the CIT(A)'s decision, stating that the interest was allowable under section 36(1)(iii) as applicable to the assessment year.7. Imposition of Penalty Under Section 271(1)(c):The AO imposed a penalty under section 271(1)(c) for concealment of income related to the transfer pricing adjustment. The CIT(A) cancelled the penalty, stating that the assessee had acted in good faith and with due diligence. The Tribunal agreed with the CIT(A) and noted that the addition made on account of transfer pricing adjustment was not sustainable. Consequently, the penalty was also found to be unsustainable and was cancelled.Conclusion:The Tribunal partly allowed the assessee's appeal by directing the exclusion of SISCO from the list of comparables and re-computation of the arm's length price. The Tribunal deleted the disallowance of bad debts written off and upheld the CIT(A)'s decision on the disallowance of interest paid on capital borrowings. The Tribunal dismissed the Revenue's appeals and upheld the cancellation of the penalty imposed under section 271(1)(c).