Transactional Net Margin Method upheld where comparables aren't rebutted; selective exclusion impermissible and account write-off validates bad debt deduction.

The Tribunal held that the AO/CIT(A) wrongly rejected the assessee's TNMM comparables by selectively excluding comparables without contrary material; where comparables are not shown to be unreliable, TNMM application must be upheld and the transfer pricing adjustment deleted. The Tribunal further held that for a bad debt claim the write-off in the assessee's accounts satisfies the entitlement test; Revenue's contrary authorities were displaced by higher court precedent and the deduction was sustained. Both issues were decided in the assessee's favour and the TP addition was deleted while the bad debt deduction was allowed.

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Issues: (i) Whether the assessing officer/cit(A) was justified in rejecting the assessee's TNMM comparables and invoking section 92C(3)(c) to adopt a higher net operating profit margin resulting in addition of Rs.24,74,800; (ii) Whether the assessee was entitled to deduction of Rs.52.35 lakhs as bad debt under section 36(1)(vii) where recovery was contested in arbitration.

Issue (i): Whether the transfer pricing adjustment under section 92C(3)(c) adopting 5.38% net operating profit margin was sustainable.

Analysis: The Tribunal examined the AO's non-reference to the TPO, the sample of comparables relied on by the assessee under Rule 10B, and the AO/CIT(A)'s exclusion of certain comparables. The Tribunal found that the AO selectively discarded comparables without demonstrating contrary material and applied a pick-and-choose approach; the assessee's adoption of TNMM and its comparable set were not shown to be defective; subsequent years' TPO orders upheld the TNMM usage and did not disturb the assessee's margin.

Conclusion: The transfer pricing addition of Rs.24,74,800 arising from adoption of 5.38% margin is deleted and the assessee's TNMM result is upheld (decision in favour of the assessee).

Issue (ii): Whether the write-off of Rs.52.35 lakhs qualifies as a bad debt deduction under section 36(1)(vii) despite pending arbitration.

Analysis: The Tribunal applied the Supreme Court precedent that after 01-04-1989 it is sufficient that a debt is written off in the assessee's accounts to qualify as a bad debt; the CIT(A) found the debt had been written off and that conditions of sections 36(1)(vii) and 37 were satisfied. The Tribunal held Revenue's contrary authorities and arguments were rendered untenable by the Supreme Court ruling and no further exercise by the AO on the write-off point altered the entitlement.

Conclusion: The deduction of Rs.52.35 lakhs as bad debt is sustained (decision in favour of the assessee).

Final Conclusion: The Tribunal allowed the assessee's appeal deleting the transfer pricing addition and dismissed the revenue's appeal challenging the bad debt deduction, resulting in an overall decision favourable to the assessee.

Ratio Decidendi: Where a taxpayer properly applies the transactional net margin method with comparable instances that are not shown to be unreliable by the assessing authority, selective exclusion of comparables without contrary material is impermissible; and for bad debt claims under section 36(1)(vii) after 01-04-1989, a debt written off in the assessee's accounts suffices for deduction entitlement.

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