2021 (2) TMI 773 - AT - Income Tax

Tribunal rules on transfer pricing adjustments, bad debts claim, and TDS credit in tax appeal

The Tribunal partly allowed the appeal by vacating transfer pricing adjustments for both international and domestic regional management charges, directing ... TP Adjustment - reference under Sec. 92CA(1) to the TPO for determining the ALP of the international transactions of the assessee for the year under consideration - regional management services received by the assessee - HELD THAT:- We find that the DRP vide its order passed under Sec.144C(5), dated 22.09.2017 had upheld the findings of the TPO by relying on the earlier order of the panel passed in the case of the assessee for A.Y 2011-12. Except for drawing support from the aforesaid view that was earlier drawn by the panel in A.Y 2011-12 while rejecting the objection of the assessee in context of the aforesaid issue, we find that no independent reasoning had been given by the DRP. As observed by us hereinabove, the order passed by the A.O u/s 143(3) r.w.s 144C(13), dated 31.12.2015 for A.Y 2011-12 had been vacated by the Tribunal [2020 (12) TMI 719 - ITAT MUMBAI]. As the facts and the issue involved as regards receipt of regional management services by the assessee from its foreign AE, viz. Henkel AG & Company KGaA remains the same as were there before the Tribunal in the aforesaid case of the assessee for A.Y 2011-12, therefore, we respectfully follow the view therein taken. Accordingly, adopting the reasoning given by the Tribunal while vacating the transfer pricing adjustment w.r.t regional management services received by the assessee from its aforesaid foreign AE, viz. Henkel AG & Company KGaA, Germany, we herein finding no reason to take a different view direct the A.O/TPO to vacate the transfer pricing adjustment made in the hands of the assesseee for the year under consideration. Transfer pricing adjustment - transaction of receipt of regional management services by the assessee from its domestic AE, viz. Chembond Chemical Limited - HELD THAT:- We are unable to agree with the view taken by the lower authorities that the assessee had failed to place on record any evidence in support of its claim of having received services from its domestic AE. Insofar the sustaining of the transfer pricing adjustment carried out by the TPO as regards the aforesaid domestic transaction of receipt of regional management services by the assessee from its AE, viz. M/s Chembond Chemical Limited, we find that the DRP had only relied on the reasoning that was adopted by it for sustaining the transfer pricing adjustment as regards the services received by the assessee from its foreign AE, viz. Henkel AG & Company KGaA. As the transfer pricing adjustment pertaining to the regional management services received by the assessee from its foreign AE, viz. Henkel AG & Company KGaA had been vacated by us in terms of our aforesaid observations, therefore, the adjustment carried out by the TPO as regards the regional management services rendered by the domestic AE of the assessee, viz. M/s Chembond Chemical Limited, which too is found to be suffering from similar incorrect factual observations and invalid of assumption of jurisdiction by the TPO who without following any of the methods provided in Sec.92C had determined the arm‟s length price of the transaction of receipt of regional management services by the assessee from its domestic AE at Nil, also cannot be sustained and has to meet the same fate. Accordingly, in terms of our aforesaid observations we herein direct the A.O/TPO to vacate the transfer pricing adjustment made by him as regards the domestic transaction of receipt of regional management service by the assessee from its AE, viz. Chembond Chemical Limited. Disallowance of “bad debts' - HELD THAT:- As the assessee company had admitted that no documentary evidence in support of its claim of deduction of “bad debts‟ of ₹ 5,77,647/- was filed before the lower authorities. In fact, no such documentary evidence in support of its aforesaid claim of deduction was filed by the assessee even in the course of the remand proceedings. Accordingly, as the assessee had failed to substantiate on the basis of irrefutable material that the aforesaid amount so claimed as bad debt during the year under consideration was earlier offered as income and charged to tax, no infirmity could be related to the disallowance of the said claim of deduction by the lower authorities. We thus uphold the disallowance of “bad debts'. Short credit of TDS - HELD THAT:- A.R had requested that the A.O be directed to allow credit for the deficit amount of tax deducted at source. As the aforesaid claim of the assessee would require verification of facts, therefore, we restore the issue to the file of the A.O with a direction to verify the aforesaid claim of the assessee. In case the claim of the assessee is found to be in order, then, the A.O shall allow credit for the balance amount of TDS alongwith interest as per the extant law. Issues Involved1. Transfer Pricing Adjustment (International and Domestic RMC).2. Corporate Tax Adjustment (Bad Debts).3. Non-Granting of TDS Credit.Detailed Analysis1. Transfer Pricing Adjustment (International and Domestic RMC)The assessee company contested the adjustments made by the Transfer Pricing Officer (TPO) and the Assessing Officer (AO) regarding regional management charges (RMC) for both international and domestic transactions. The TPO determined the Arm's Length Price (ALP) of these services at NIL, asserting that the services were not substantiated by adequate documentary evidence. The Dispute Resolution Panel (DRP) upheld this view, relying on previous assessments.International RMC:The Tribunal found that the assessee had provided substantial evidence, including service agreements, debit notes, and cost-benefit analyses, to demonstrate the receipt of services from its foreign associated enterprise (AE), Henkel AG & Co. KGaA. The Tribunal referenced its prior decision in the assessee's case for A.Y. 2011-12, which vacated a similar adjustment, emphasizing that the TPO must follow one of the prescribed methods under Sec. 92C(1) of the Act. The Tribunal concluded that the TPO's determination of ALP at NIL without following these methods was not permissible and directed the AO/TPO to vacate the adjustment of Rs. 2,43,62,544/-.Domestic RMC:Similarly, for the domestic AE, Chembond Chemical Limited, the Tribunal found that the assessee had provided sufficient documentary evidence, such as service agreements and invoices, substantiating the receipt of services. The Tribunal held that the TPO's determination of ALP at NIL without following the prescribed methods was invalid. Consequently, the Tribunal directed the AO/TPO to vacate the adjustment of Rs. 1,29,54,376/-.2. Corporate Tax Adjustment (Bad Debts)The assessee claimed a deduction for bad debts amounting to Rs. 1,08,02,000/-. The DRP, based on the AO's remand report, restricted the disallowance to Rs. 5,77,647/- due to lack of evidence that this amount was previously charged to tax. The Tribunal upheld this disallowance, noting that the assessee admitted to not providing documentary evidence for the Rs. 5,77,647/- claim. Thus, the Ground of appeal No. 8 was dismissed.3. Non-Granting of TDS CreditThe assessee contended that the AO allowed short credit of TDS, granting only Rs. 1,35,264/- against an entitlement of Rs. 1,85,228/-. The Tribunal restored this issue to the AO for verification. If the assessee's claim is found correct, the AO is directed to allow the credit for the deficit amount along with applicable interest. This Ground of appeal No. 9 was allowed for statistical purposes.ConclusionThe appeal was partly allowed. The Tribunal vacated the transfer pricing adjustments for both international and domestic RMC, upheld the disallowance of the bad debts claim for Rs. 5,77,647/-, and remanded the issue of TDS credit for verification.