2025 (8) TMI 287 - AT - Income Tax

TNMM Approach Accepted for Marketing Fee; Interest Adjustment Deleted; Corporate Guarantee Fee Limited to 0.5%

ITAT Chennai remanded the marketing service fee issue to the TPO to accept the assessee's TNMM approach using foreign AEs as comparables after verifying ... TP Adjustment - international transactions relating to Marketing service fee paid by the Assessee - HELD THAT:- We are remitting the issue back to the TPO with a direction to accept the assessee’s claim of following the TNMM for payments made towards marketing service fees by considering the comparable as Foreign AEs, after verification of additional evidence furnished before us to prove the nature / kind of services received by the assessee from AEs. Transfer Pricing Issue – Upward adjustment on account of interest on trade receivables from AEs - DR submitted that the assessee has not furnished any details or statement to prove that the sales / billing are charged equally to the AE and non-AEs, hence it is not acceptable - HELD THAT:- We find that the assessee has not charged any interest for the outstanding receivables from the AEs for an international transaction. As submitted by the ld.AR, normally the companies factor the opportunity cost/ interest component involved in delayed collection of receivables in the price/ mark-up charged for the products rather than levy of actual interest on belated payments made by the customer. We find that in the case on hand, the assessee has not charged interest on delayed collection of receivables both from AEs as well as non-AE customers. We are inclined to delete the addition made by the AO by allowing related grounds of appeal raised by the assessee. TP Adjustment - Upward adjustment on account of fees chargeable on the Corporate Guarantee given by the Assessee to its AEs - HELD THAT:- Assessee had not incurred any cost/outflow on account of issuance of corporate guarantee. In the present set of facts, we are in agreement with the alternative ground pleaded by the assessee, since the assessee has not incurred any expenditure on account of the corporate guarantee, that the corporate guarantee fee, if any, to be charged should be restricted only to the utilised amount of AED 3.1 million and not the sanctioned amount of AED 11 million as computed by the TPO. Our above view is supported by the judicial precedents relied upon by the assessee. Therefore we direct the TPO to recompute the Upward adjustment of fee on corporate guarantee provided by restricting to 0.5% of the utilized sum of AED 3.1 million. Disallowance of depreciation claimed @ 40% on ATM machines by restricting it to 15% chargeable on ‘Plant & machinery’ - HELD THAT:- Following the rule of consistency, we are inclined to set aside the order of the AO/DRP on this issue and direct the AO to allow the deprecation on ATM Machines @ 40%. Disallowance pertaining to deduction claimed on account of gratuity - HELD THAT:- On perusal of the computation of income for the year ending 31.03.2020 (A.Y. 2020-21) it is found that the assessee has added back on account of provision for gratuity debited to profit and loss account. Therefore, it is evident that the said sum pertains only to reversal of excess provision and not the unpaid amount of disallowance u/s. 43B. Hence, in our considered view the AO/DRP have erred in disallowing the deduction claimed and direct the AO to allow the deduction. Accordingly, we allow the ground of appeal filed by the assessee. Disallowance towards bad debts written off - HELD THAT:- We find that the assessee has raised invoices for the revenue to the banks from F.Y.2007- 08 upto 2020-21, which have been recognised as revenue in the respective financial years - some of the customers of the assessee have not paid certain amounts out of the invoices raised and which were offered as revenue in the respective earlier years, the assessee has written off the same as bad debts in the impugned A.Y. 2021-22 (FY 2020-21) by transferring such amount to the profit and loss account. On perusal of the ledgers, we find that the assessee has furnished the details of income shown in the earlier A.Ys. which has been written off during the impugned assessment year as not realizable. In considering this issue we take the guidance of the Hon’ble Apex court in the case of TRF Ltd. [2010 (2) TMI 211 - SUPREME COURT] as held the position in law is well-settled. After 1-4-1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. Additional claim of Loss not made in the Return of Income filed - HELD THAT:- Loss claimed by the assessee based on the audited financial statements as on 31.03.2021 has to be considered for the purpose of computing the actual income / loss of the assessee for the purpose of taxation also. Our view is supported by the decision of Ramco Cements Limited [2014 (11) TMI 447 - MADRAS HIGH COURT] and Hindustan Pilkington Glass Works Ltd. [1989 (7) TMI 336 - CALCUTTA HIGH COURT] - we are inclined to remit the issue back to the AO for verification of the additional documents filed for claiming the loss and decide the issue in accordance with law. Additional deduction towards ATM site rent charges paid - HELD THAT:- We are inclined to remit the issue back to the files of the AO for limited purpose of verification of the correctness of the claim from the records and documents filed by the assessee and direct the AO to allow the IND AS adjustment towards ATM site rent charges derecognized for Right of Use (ROU). Thus, the related grounds raised by the assessee is allowed. ISSUES: Whether the aggregation approach using Transactional Net Margin Method (TNMM) is the Most Appropriate Method (MAM) for benchmarking marketing service fees paid to Associated Enterprises (AEs) under transfer pricing provisions.Whether upward adjustment on account of interest on trade receivables from AEs constitutes a separate international transaction and the validity of the method and rates applied for such adjustment.Whether fees chargeable on corporate guarantees given by the assessee to its AEs constitute an international transaction and the appropriate basis for computing such fees.Whether depreciation on ATM machines should be allowed at 40% as claimed or restricted to 15% as plant and machinery.Whether disallowance of deduction claimed on account of gratuity under section 43B is justified in absence of documentary evidence of payment.Whether disallowance of bad debts written off is justified for want of credible documentary evidence that such debts were offered to tax in earlier years.Whether additional claims of loss and deduction not made in the original Return of Income but disclosed in audited financial statements can be allowed.Whether additional deduction towards ATM site rent charges paid and derecognized for 'Right of Use' Assets (IND AS adjustment) can be allowed despite omission in the original Return of Income. RULINGS / HOLDINGS: On marketing service fees, the Tribunal held that the assessee's adoption of TNMM on an aggregated basis with Foreign AEs as the tested party is justified and 'the adoption of 'Other Method' under Rule 10AB by the TPO in benchmarking the marketing services received by the Assessee is erroneous and unwarranted.' The matter is remitted to the Transfer Pricing Officer (TPO) for verification of additional evidence submitted.The upward adjustment on interest on trade receivables from AEs was deleted as 'normally the companies factor the opportunity cost/ interest component involved in delayed collection of receivables in the price/ mark-up charged for the products rather than levy of actual interest,' and the assessee had not charged interest uniformly on AE and non-AE receivables.Regarding fees on corporate guarantees, the Tribunal restricted the adjustment to 0.5% of the utilized loan amount (AED 3.1 million) rather than 2.58% on the sanctioned amount (AED 11 million), holding that 'the corporate guarantee fee, if any, to be charged should be restricted only to the utilised amount' as the assessee incurred no cost or outflow on issuance of the guarantee.Depreciation on ATM machines was allowed at 40%, following earlier Tribunal decisions and relevant case law, rejecting the department's restriction to 15% on the ground that 'ATM machines are computerized telecommunication device' and the issue has not attained finality.The disallowance of gratuity deduction under section 43B was set aside, holding that the amount pertains to 'reversal of excess provision' and not payment, and therefore 'the AO/DRP have erred in disallowing the deduction claimed.'The disallowance of bad debts written off was deleted, as the assessee had furnished ledger extracts and evidence that the debts were offered to tax in earlier years, following the Supreme Court's ruling that 'it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee.'Additional claim of loss not made in the original Return of Income was allowed to be considered since the omission was bona fide due to delay in statutory audit caused by shareholder dispute, and the claim is supported by audited financial statements; the issue was remitted to the Assessing Officer (AO) for verification.Additional deduction towards ATM site rent charges derecognized for Right of Use Assets (IND AS adjustment) was allowed, remitting the issue to AO for verification, holding that 'the AO/DRP has not considered the assessee's claim' and the deduction is supported by audited financial statements. RATIONALE: The Tribunal applied the statutory provisions of the Income Tax Act, 1961, specifically sections 92B, 92CA, 43B, 143(3), 144C, and Rule 10AB of the Income Tax Rules relating to transfer pricing and arm's length price (ALP) determination. It relied on judicial precedents including decisions of High Courts and ITATs, as well as authoritative guidelines such as the OECD Transfer Pricing Guidelines 2022 and United Nations Practical Manual on Transfer Pricing.On transfer pricing issues, the Tribunal emphasized the principle that ALP determination must be on a transaction-by-transaction basis but recognized the aggregation of closely linked transactions as permitted under Rule 10A(d). It accepted the assessee's functional analysis and benchmarking approach using TNMM with Foreign AEs as the tested party, consistent with established jurisprudence.The Tribunal recognized that interest on trade receivables is generally factored into pricing and that separate interest adjustments require careful justification. It noted the retrospective amendment to the definition of international transaction but held that the facts did not warrant separate adjustment as the assessee's practice was consistent across AE and non-AE transactions.Regarding corporate guarantees, the Tribunal distinguished between standby letter of credit and direct corporate guarantees, and held that fees should be based on utilized amounts and not sanctioned limits, reflecting the actual economic exposure and cost to the guarantor. It relied on relevant case law to reject benchmarking on bank guarantee rates.On depreciation, the Tribunal relied on prior binding decisions of the Jurisdictional ITAT and relevant High Courts recognizing ATMs as computerized telecommunication devices eligible for higher depreciation rates, applying the principle of consistency and judicial discipline.For gratuity provision, the Tribunal interpreted section 43B strictly to allow deduction only on actual payment, not on accounting reversals, and found that the disallowance was based on a misinterpretation of the nature of the claim.On bad debts, the Tribunal followed Supreme Court precedent that writing off bad debts in accounts suffices for deduction, and the AO's failure to verify proper accounting was an error.Regarding additional claims omitted in the original return, the Tribunal applied judicial principles allowing fresh claims when omission is bona fide and supported by audited accounts, emphasizing the power of appellate authorities to admit such claims.The Tribunal remitted issues requiring factual verification and application of law consistent with the above reasoning to the AO or TPO for fresh consideration, ensuring adherence to principles of natural justice and proper procedure.