TaxTMI 
TaxTMI 
2016 (3) TMI 639
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....llowing ground nos. 2 and 3: "1. For that the CIT(A) erred in confirming the disallowance of bad debts amounting to Rs. 2,81,54,266 and Rs. 64,04,000/- totaling to Rs. 3,45,58,266/-. The CIT(A) erred in relying on various documents and evidences in this regard which was not disclosed to the appellant and with which the appellant was not confronted. 2. For that the CIT(A) failed to appreciate the facts of the case and did not consider the various details filed in this regard and erred in holding that the appellant should have obtained confirmation from the buyers regarding the bad debts and that the debts written off pertained to the same financial year." For AY 2004-05 in ITA No. 1256/K/2009, the assessee has raised following ground no.1: "1. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the action of the AO in disallowing the appellant's claim for deduction of bad debts written off in the books of account for the financial year ended 31st March, 2004 amounting to Rs. 5,05,24,710/- and further erred in confirming the action of the AO in disallowing the appellant's claim of advances written off in ....
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....ritten off during the relevant previous year, a sum of Rs. 5,05,24,710/- being bad debts as irrecoverable in the books of accounts. Out of the said sum an amount of Rs. 4,68,90,427/- was written off through provision account and an amount of Rs. 36,34,283/- was directly written off in the Profit and Loss Account for the relevant previous year relevant to this assessment year. It is a fact that assessee is engaged in the manufacture of various types of chemicals which are used inter alia in steel, paper, water treatment and other industries. The facts explained by assessee for the above bad debts are that due to peculiar nature of the business carried on by assessee and the system of computation of sale price by assessee. As and when the supply is made to a customer a bill is raised on the customer depending upon the quantity of material supplied by the assessee. However, the customers pay the amount on the basis of the production achieved by them out of the material supplied by the assessee on the basis of the pre-approved formula and if the consumption of the material supplied by the assessee for production by the customer is more than in that event proportionate reduction is made....
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....e debt in question must be written off as irrecoverable in the accounts of the assessee for the relevant previous year and The amount of the debt must have been taken into account in computing the income of the assessee at any time prior to being written off in the books of accounts. In our view, there is no dispute to the fact that the assessee had satisfied both the conditions with respect to its claim for being allowed deduction with respect to bad debts written off. The same has been accepted by CIT(A) also. The pivotal question, which falls to be adjudicated, is whether under the present position of law, the assessee is required to prove before the AO that the debt in question had actually become bad, in order to be entitled to the deduction envisaged in section 36(1) (vii) of the Act with respect to the same. Reference made by Ld. Counsel for the assessee to the judgment of Hon'ble Supreme Court in the case of TRF Ltd v CIT 323 ITR 397 (SC) wherein Hon'ble Supreme Court has held that post 1st April, 1989 it is not necessary for any assessee to establish that the debt in fact has become bad. It is further held that if the debt has been written off in the bo....
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.... from the facts in entirety that the assessee had written off actual bad debt in the profit and loss account through the provision for bad debt created earlier, the details of which are filed by assessee at page 4 of assessee's paper book and further at the year end the balance sheet of assessee has disclosed the sundry debtors at net of provision figure. In view of the facts and circumstances of the case and precedent cited above, we are of the view that bad debts claimed by the assessee are allowable and we allow accordingly. This issue of assessee's appeal is allowed. 7. The next issue in ITA No. 529/K/2008 for AY 2003-04 is against the order of CIT(A) in confirming the disallowance of write off on account of reduction in the value of stock. For this, assessee has raised following ground no.4: "4. For that the CIT(A) erred in confirming the disallowance of Rs. 60,00,622/- written off by the appellant on account of reduction in the value of the stock of goods. The CIT(A) failed to appreciate the fact that the write off was made in accordance with the established and accepted practice followed by the appellant were in accordance with the Accounting Standard and the cla....
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....ng stock after reduction of provision for obsolete stock disclosed as opening stock for the immediate next year i.e. AY 2004- 05. The value of closing stock of raw material for the year ending 31.03.2003 and the value of opening stock of raw material as on 01.04.2004 are given hereunder. Particulars Amount as per audited accounts (INR) Closing stock of raw materials as on 31.03.2003 Rs.7,11,12,000/- Opening stock of raw material as on 01.04.2004 Rs.7,11,12,000/- We find that the allegation of the lower authorities that the assessee company has not filed the details to substantiate that in the next year the obsolete stock of raw material were sold at reduced price as included in the closing stock in the AY 2003-04 has no basis as the assessee had not included the value of obsolete stock in the valuation of closing stock for the year ended 31.03.2003. This was done for the reason that such stock has become of nil value and question of selling the same in the next year does not arise. In view of these facts and circumstances, we are of the view that the action of the lower authorities in making addition and confirming the same in regard to provision for obs....
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....ed 31.03.2003 and added back the same to the computation of total income. The assessee during the relevant assessment year made payment of gratuity amount of Rs. 31,89,486/- to gratuity fund being maintained by LIC. This fact is very much available in the accounts and tax audit report. We find that the assessee during the course of assessment proceedings filed details in regard to gratuity payment and provision made in the books of account and difference was only to the extent of Rs. 8116/- only. The reconciliation statement reads as under: Image No. 1 In view of the above reconciliation statement, we are of the view that the disallowance should be restricted to the extent of Rs. 8116/- only and that that extent the addition is confirmed and balance is deleted. This issue of assessee's appeal is partly allowed. 13. The next common issue in both the appeals of assessee is as regards to the order of CIT(A) confirming the addition being the adjustment made by Transfer Pricing Officer u/s. 92CA(3) of the Act. For this, assessee in ITA No. 529/K/2008 for AY 2003-04 has raised following ground nos. 11 to 17: "11. For that the CIT(A) erred in confirming the addition of R....
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....umstances of the case and in law, the Ld. CIT (Appeals) erred in confirming the addition made by the Transfer Pricing Officer (TPO)/ AO amounting to Rs. 1,51,74,980/- to the returned income of the appellant for the previous year relevant to the assessment year 2004-2005 in regard to the technical consultation fees paid by the appellant to its Associated Enterprise, namely, Nalco Pacific Pte Ltd, Singapore, during the period under consideration. 2(b) That on the facts and in the circumstances of the case and in law, the Ld. CIT(Appeals) erred in confirming the aforementioned addition of INR 1,51,74,980/- without appreciating the fact the TPO/ AO cannot hold that the transaction of payment of technical fees of Rs. 1,51,74,980/- by the appellant to its Associated Enterprise is not at arm's length and determining the arm's length price in this regard as nil without applying any of the methods for determining arm's length price as prescribed under Section 92C(1) of the Income-Tax Act, 1961 (ITA), being the most appropriate method as prescribed under Section 92C(2) of the ITA read with rule 10C of the Income-tax Rules, 1962 (ITR) as well as erred in rejecting the met....
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....ed 1,603,119.00 Comparable Uncontrolled price ('CUP') Method 6. Reimbursement of expenses 6,893,894.00 TNMM The TPO observed in his order that in response to the notice u/s 92CA (2) of the Act, the assessee attended his office and filed details which were placed on record. The TPO held in his order that the pricing of the aforesaid agreement in respect of technical consultation fees amounting to Rs. 15,174,980/- paid by assessee to Nalco Pacific for AY 2004-05 was justified on the basis of Transactional Net Margin Method. But the TPO had raised the following objections: a) First objection: The TPO noted that the services rendered by Nalco Pacific were more in the nature of directions/management decision/routine advice which were provided by Nalco Pacific to the assesse to take care of its own interests rather than to meet the identified needs of the assessee. b) Second objection: The TPO further noted that though some incidental benefits accrued to the assessee, yet such benefits would not be ones for which an independent enterprise would be willing to pay. c) Third objection: The TPO noted that the aforesaid international t....
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...., yet such benefits would not be ones for which an independent enterprise would be willing to pay. Based on the aforesaid allegations, he determined the value of the aforesaid international transaction at 'NIL' value. The CIT (A) confirmed the arm's length price computation done by the TPO in his order. Ld. Counsel at this juncture referred to section 92 of the Act provides that any income arising from an international transaction between associated enterprises shall be computed having regard to the arm's length price and any expense or outgoing in an international transaction is also to be computed having regard to the arm's length price. As per the provision of section 92C of the Act read with rule 10B and 10C of the Rules, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, such as(a) comparable uncontrolled price method; or (b) resale price method; or (c) cost plus method; or (d) profit split method; or (e) transactional net margin method; or (f) any other method which may be prescribed by the Board. 18. Ld. Counsel for the assesse explained that the....
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....sse from Nalco Pacific under the agreement would not be ones for which an independent enterprise would be willing to pay. In this connection Ld. Counsel referred to the decision of the Hon'ble Delhi High Court in the case of CIT v. EKL Appliances [2012] 24 taxmann.com 199 (Delhi), wherein the Hon'ble High Court has examined the issue as to whether the TPO has power to restrict the value of an international transaction to nil when he was supposed to have determined the arm's length price of the international transaction. The Hon'ble High Court after examining the facts of the case held as under: "19...... In CIT v. Walchand& Co. etc. [1967] 65 ITR 381, it was held by the Supreme Court that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. . . 22. Even Rule 10B(1)(a) does not authorize disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the ....
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....r law and so long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. But in the present case before us, the TPO judged the reasonableness of the aforesaid intra-group service charge and computed the arm's length price of the international transactions under review at 'NIL' value based on his main allegation that the benefits claimed to have been received by the assessee from Nalco Pacific under the aforesaid agreement would not be ones for which an independent enterprise would be willing to pay. The CIT (A) also confirmed his order. 21. Attention was further invited to the decision of Hon'ble Delhi Tribunal of McCann Erickson India (P.) Ltd vs. Addl. CIT [2012] 24 taxmann.com 21 (Delhi), wherein the Tribunal, following the aforesaid decision of the Hon'ble Delhi High Court, has interalia held that: "9. We have heard both sides and have also gone through the orders of the AO, TPO and DRP.... The evidences have been submitted before the authorities below showing rendering of the certain services against the paym....
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....inciple laid down by Tribunal along with brief facts are as under: * The assessee received information technology (in short, 'I.T.')services from its associated enterprise and paid service charge to the latter. The assessee clubbed the aforesaid international transaction together with other international transactions, applied the TNMM as the most appropriate method and selected a set of external comparables. As per this analysis, the international transactions covered under the TNMM, were at arm's length. The aforesaid analysis by assessee was not disputed by the TPO. * The assessee was called upon by TPO to provide the basis of pricing of these transactions. The assessee was also required by the TPO to provide necessary details along with allocation keys and basis of calculation of payment made for I.T. support services. According toTPO, the assessee, however, failed to comply with these requirements and the ALP of the relevant transactions therefore wasdetermined by TPO at 'nil' value. * The CIT(A) held that the action of TPO in arriving at the ALP of the relevant international transactions at "nil" was without any basis and accordin....
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....O did not make any adverse comments in his order upon the arm's length analysis carried out by assesse under the TNMM as per section 92C of the Act read with rule 10B of the Rules. Accordingly, we feel that TPO made proper enquiry and applied his mind to the details brought on record by assessee. He had agreed with the assessee that the international transactions covered by the TNMM analysis (including the intra-group service charge paid /payable to Nalco Pacific) adhered to the arm's length principle Transfer Pricing Regulation. 24. Further, it is also a fact that the aforesaid intra-group service charge was allowed as deduction by TPO for the assessment years 2005-06, 2006-07, 2007-08 and 2008-09. In this connection, Ld. Counsel referred to the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Britannia Industries Ltd 257 ITR 225, wherein Hon'ble Calcutta High Court has held that the Department cannot take a contrary view in respect of any issue which has been accepted by the Department for succeeding assessment year based upon the similar set of facts. Thus, by following the above principle laid down by the Hon'ble Calcutta High Court, we feel....
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.... rendering services to Nalco Asia Pacific group of companies including assessee. Nalco Pacific incurred expenses for the payment of salaries & other benefits to the regional employees. We find that the services rendered by Nalco Pacific to assessee under the agreement were similar to the services mentioned in paragraph no. 7.14 of the DECD Guidelines. In view of this, we appreciate that the services rendered by Nalco Pacific to assessee were intra-group services for which independent enterprises would have been willing to pay for or to perform in-house for themselves and hence, the value of the aforesaid services in comparable uncontrolled transactions could not be 'nil'. The paragraph no. 7.12 of the OECD Guidelines provides that there are some cases where an intra-group service performed by a group member such as a shareholder or coordinating centre relates only to some group members but incidentally provides benefits to other group members. Examples could be analysing the question whether to recognise the group, to acquire new members, or to terminate a division. These activities may constitute intra-group services to the particular group members involved, for example th....
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.... and costs expended in fulfilling its third party contracts). As a result, MNEs in such a case are encouraged to adopt the direct-charge method in relation to their transactions with associated enterprises. It is accepted, however, that this approach may not always be appropriate if, for example, the services to independent parties are merely occasional or marginal. Further it has been provided in paragraph no. 8.2.2 of the OECD Guidelines that a direct-charge method for charging for intra-group services is so difficult to apply in practice in many cases for the MNE groups that such groups have developed other methods for charging for services provided by parent companies or group service centres. In such cases, the MNE groups may find that they have few alternatives but to use cost allocation and apportionment methods which often necessitate some degree of estimation or approximation, as a basis for calculating an arm's length charge. Such methods are generally referred to as indirect-charge methods. The allocation might be based on turnover, or staff employed, or some other basis. Whether the allocation method is appropriate may depend on the nature and usage of the service. ....
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....sue is that the CIT(A) confirmed the addition of Rs. 1,51,74,980/- without considering that the aforesaid payments were approved by the Reserve Bank of India. Ld. Counsel referred to page no. 52 of the assessee's paper book, wherein the Reserve Bank of India (Exchange Control Department) vide letter (Reference No. 1068/03.19.0007 (XI) / 2000-01 dated 3rd April, 2001 intimated their "in-principle" approval for remittance of consultancy charges to Nalco Pacific @ 2% of net sales for the calendar year 2001. It is a fact that the rate at which intra-group service charges was paid / payable to Nalco Pacific for the assessment year 2004-05 remained the same (i.e. 2% of net sales) as the rate mentioned in the aforesaid approval letters. Ld. Counsel also referred to decision of Mumbai Tribunal in the matter of Thyssenkrupp Industries India (P.) Ltd. vs ACIT [2013] 33 taxmann.com 107 (Mumbai - Trib.), wherein the assessee company entered into collaboration agreement with its associated enterprise for payment of 2% of contract value for manufacturing, drawing and engineering services and 5% of the selling price as royalty. The assessee company applied to the RBI seeking approval in respect o....
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....ge approved by the RBI, are at arm's length price. Accordingly, we delete the addition and allow this issue of assessee's appeals. This common issue in both years is allowed. The appeals of the assessee are allowed. 30. The next issue in ITA No. 1256/K/2009 for AY 2004-05 is as regards to the order of CIT(A) confirming the adjustment made by TPO in respect to disallowance of export of chemicals to associated enterprises valued Rs. 39,78,196/-. . For this, assessee has raised following ground nos. 3(a) and 3(b): "3(a) That on the facts and in the circumstances of the case and in law, the Ld. CIT(Appeals) erred in confirming the addition made by the TPO/ AO amounting to Rs. 39,78,196/- to the returned income of the appellant for the previous year relevant to the assessment year 2004-2005 in regard to export of chemicals by the appellant to its associated enterprises during the period under consideration. 3(b) That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the addition made by the TPO/ AO amounting to Rs. 39,78,196 which was based on erroneous application of the Comparable Uncontrolled Price (CUP) method w....
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....CUP') Method to determine the arm's length prices to the aforesaid international transactions with reference to the uncontrolled transactions between assessee and the third party customers such as Bongaigaon Refinery Petrochemicals Ltd and Haldia Petrochemicals Ltd. Accordingly, an adjustment of Rs. 39,78,196/- was recommended to the income of assessee. 32. Assessee before CIT(A), contended that the functions performed by the associated enterprises and unrelated parties were different and geographical difference also caused significant variation in international transactions. But he rejected the contentions of assessee. His main allegation was that there was no rationale for price differentials between controlled and uncontrolled transactions. The CIT (A) further held that the findings of the TPO were not to be interfered with. He confirmed the aforesaid addition / adjustment to income made by the AO based on the recommendation of the TPO. Aggrieved, assessee preferred an appeal before Tribunal. 33. Before us, Ld. Counsel for the assessee argued that there was rationale for price differentials between controlled and uncontrolled transactions. He referred to page no. 5....
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.... regard, Ld. Counsel invited our attention to rule 10B(2) of the Rules, wherein one of the factors of comparability between controlled and uncontrolled transactions is '(a) the specific characteristics of the property transferred or services provided in either transaction'. Specific attention was invited to rule 108(1)(a) of the Rules, which interalia reads as under: "Determination of arm's length price under section 92C 10B.(1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the....
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....irement for the aforesaid factor of comparability is the strictest under the CUP Method. The OECD also provides that it may be difficult to find a transaction between independent enterprises that is similar enough to a controlled transaction such that no differences have a material effect on price. Even a minor difference in the property transferred in the controlled and uncontrolled transactions could materially affect the price even though the nature of the business activities undertaken may be sufficiently similar to generate the same overall profit margin. In the instant case, the characteristics of EC5300A/180 sold to Bongaigaon Refinery Petrochemicals Ltd were significantly different from those of EC5300A/180 sold to Ondeo Nalco (Sanghai) Trading Co. Ltd and Nalco Hong Kong Ltd on the account of the following reasons: * Difference in Quality, Reliability and Availability: EC5300A/180 became part of obsolete stock, had shelf life issues and therefore was not in normal saleable condition in the market when the same was transferred to Ondeo Nalco (Sanghai) Trading Co. Ltd and Nalco Hong Kong Ltd. The personnel of the appellant company were planning to sell the obsolete ....
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....t when the same was transferred to Haldia Petrochemicals Ltd. In view of the above differences, we are of the view that characteristics of EC3210A/198 transferred in the uncontrolled transaction between assessee and Haldia Petrochemicals Ltd were not at all comparable to the characteristics of EC3210A/198 transferred in controlled transactions between assessee and Ondeo Nalco Thailand. The TPO did not adjust the price charged by assessee in the uncontrolled transaction in order to account for the aforesaid differences between controlled transaction and uncontrolled transaction. Hence, the application of the CUP Method made by the TPO in the above case was inappropriate. 37. The decision of Mumbai Tribunal in the matter of Gharda Chemicals Ltd vs. DCIT in 2009 TIOL 790 (ITAT-Mum.) and [2010] 35 SOT 406 (MUM.) which inter alia reads as under: "15. Now we come to CUP method by which the price charged or paid for property transferred in comparable uncontrolled transaction is identified. Such price is adjusted to account for differences which could materially affect the price in the open market ....... . 16 The essence of determining ALP under CUP method is to en....
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....t. On the other hand, EC5300A/180 was sold to Bongaigaon Refinery Petrochemicals Ltd and EC3210A/198 was sold to Haldia Petrochemicals Ltd when the chemicals were in good physical condition and had demand from various customers. The prices at which the chemicals were sold to the aforesaid independent parties were determined by the free interplay of demand and supply forces in the open market. We further find that the TPO did not adjust the prices charged by assessee in uncontrolled transactions with Bongaigaon Refinery Petrochemicals Ltd and Haldia Petrochemicals Ltd on account of the differences in quality, reliability and availability of chemicals, volume of supply, geographical location, availability of raw material, demand and supply equation between the respective controlled transactions and the uncontrolled transactions in chemicals EC5300A/180 and EC3210A/198.Hence, we delete the addition/adjustment of Rs. 39,78,196/- made by the AO and confirmed by CIT (A). 39. The next issue in the appeal of assessee in ITA No.529/kol/2008 for the assessment year 2003-04 is as regards to the order of ld. CIT(A) confirming the disallowance of ad hoc on the basis of amalgamation of Acqa C....