TaxTMI 
TaxTMI 
2019 (7) TMI 1827
X X X X Extracts X X X X
X X X X Extracts X X X X
....tional transaction of export of finished goods and not considering the comparability analysis as documented in transfer pricing study report for the assessment year 2011-12 provided by the Appellant Ground 2- Erroneous rejection of segmental profit and loss A/c of the Appellant and consideration of "Entity Level" margin of the appellant On the facts and circumstances of the case and in law, 2.1 The learned AO based on the directions of the Hon'ble DRP, has erred in considering "Entity level" margin of the Appellant. 2.2 The learned AO, based on the directions of the Hon'ble DRP has erred in rejecting the certified segmental profit and loss account. 2.3 Without prejudice to the above, finance cost / charges should be treated as non-operating while computing the Profit level Indicator ('PLI') of the Appellant for application of Transactional Net Margin Method ('TNMM'). 2.4 The AO/TPO/DRP have erred in law and on facts in treating the disallowance of Bad Debts of Rs. 10,14,691/- and Provision of Rs. 10,00,000/- respectively as operating expenses in computing the PLI of the Appellant. Ground 3- Erroneous computation....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s international transactions with AEs and therefore, transactions were the subject-matter of benchmarking exercise for determining the arm's length price. 5. In the TP study of the assessee, TNM Method (TNMM) was followed as the Most Appropriate Method (MAM) and identified a final list of 10 comparables. The arithmetic average PLI of the said exports (RTS) segment is 9.10% against that of the PLI of the comparables is 6.85%. For working out the PLI of RTS-Export segment, assessee apportioned all the business expenses of the assessee between the segments. For this allocation of the assessee, the assessee relied on a certificate issued by the Cost Accountant. 6. However, the TPO found the said allocation of the operational cost vague and unacceptable. Therefore, the TPO rejected the PLI of the RTSExport segmental data of the assessee and proceeded to adopt the entity level PLI of the assessee. Accordingly, the TPO worked out the assessee's PLI at entity level at 3.43% and made certain adjustments too. Further, coming to the PLIs of said list of 10 comparables, the TPO rejected final list of the comparables of the assessee with the exception of the ADF Foods Ltd. with PLI of 15.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Assessing Officer in this regard. Thus, the DRP passed a direction u/s 144C(5) of the Act vide its direction dated 15.12.2015. A. Referring to the basis of allocation of expenses, the assessee submitted to the DRP that while the sales, exports, purchases of goods, product development expenses and foreign exchange losses etc are considered on actual basis. The overhead expenses like salary and other expenses were allocated on sales basis. These basis of allocation of salary and other expenses was questioned by the TPO/Assessing Officer and the DRP and held that the segment results are not reliable. The said certificate issued by the Cost Accountant was also not accepted. The contents of para 2.4.2 of the DRP's order are relevant. Thus, it is a case of the assessee that RTS segmental data should be accepted. The entity level approach adopted by the TPO should be rejected in view of the settled principle of consistency. B. Further, regarding the need for treating the finance/interest cost as non-operating expenses for the purpose of computing the PLI of the assessee, it was submitted to the DRP/TPO Rs. 92,98,000/- was incurred by the assessee and the same constitutes non-oper....
X X X X Extracts X X X X
X X X X Extracts X X X X
....The other corporate issue i.e. (i) the addition on account of bad debts of Rs. 10,14,691/- and (ii) the provision of Rs. 10,00,000/- were also adjudicated on the correction of disallowance and treated the same as an operating cost of the assessee for PLI purpose. Regarding the addition on account of bad debts of Rs. 10,14,691/-, the brief facts are that, in the assessment proceedings, the Assessing Officer wanted the assessee to file the details about the claim of bad debts written off in the books of account. On examining the said details, the Assessing Officer noted that the sum of Rs. 10,14,691/- involving M/s. Vista Process Foods Pvt. Ltd. is not an allowable expense as the assessee has a running account with the said party. On the basis of running account, the Assessing Officer considered the same as not a bad debt. This ground was not pressed before the DRP and hence, the same was dismissed as not pressed. Further, regarding the provision of Rs. 10,00,000/- for operating expenses, the brief facts are that the Assessing Officer noted that the assessee made a provision of Rs. 10,00,000/- for operating expenditure and the same was found made without any basis. The Assessing O....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... also for the purpose of PLI workings. This approach of the Assessing Officer/TPO/DRP was contested before us and various arguments were made to substantiate the claim of the assessee. The assessee filed a written note on this issue. In the said note, the assessee submitted that the revenue consistently accepted the export segment results since the assessment years 2007-08 to 2010-11. Before the TPO/ Assessing Officer, the assessee furnished details of Profit and Loss Account based on the books of account maintained by the assessee. Relying on the DRP's direction given in para 2.4.2 of the order in favour of the Revenue, assessee argued that the same constitutes violation of the principle of consistency. Highlighting this principle, ld. Counsel submitted that there is a finding of fact from this Tribunal for the assessment year 2007-08 in favour of upholding the AEs segment results and the same is not in favour of the entity level results of the assessee. Moreover, it is a fact that the TPO himself rejected the entity level margins and computed the PLI for the assessment years 2010-11 and 2011-12. Therefore, on hearing ld. Counsel for the assessee on one side and the arguments of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ds no.2 & 2.3 are allowed in favour of the assessee. (D) Disallowance on account of bad debts/ Provision for operational expenses - Treatment to these additions in matters of PLI calculations 12. Ground no.2.4 relates to the disallowance on account of (i) bad debts and (ii) provision towards operating expenses. The ground no.5 relates to the Assessing Officer's decision in disallowing these two items on merits. In ground no.5, assessee argues that if the disallowance is confirmed, the income of the assessee stands increased to that extent and such increased income constitutes an operating profit of the assessee and the same should be considered for the purpose of calculating the PLI of the assessee. In case, the same is allowed, the same constitutes operating cost. We shall now take up the merits of disallowance and the same is justified on merits. Merits of disallowance A. Bad Debts 13. The assessee claimed the bad debts of Rs. 10,14,694/- involving Vista Process Foods Pvt. Ltd., the debtor. The Assessing Officer disallowed the same on the ground that the assessee continues to have considered in transactions with the said debtor. However, there is no dispute o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng Officer is directed to consider the same as operating income while calculating the PLI of the assessee. Accordingly, ground no.2.4, 5 and its sub-grounds disposed of as above. (D) Treatment to be given to the export incentives 16. The said limb relates to erroneous computation of operating margin qua the treatment to be given to the export incentives. The assessee reported earnings of the export income of Rs. 4,42,78,000/- (page 264 of the Paper Book). In this regard, the case of the assessee is that the same constitutes an operational income and the same claim was accepted by the authorities in many assessment years in the past. Therefore, considering the principle of consistency, we are of the opinion the assessee's claim should be allowed in his favour. The jurisdictional High Court's judgement in the case of Welspun Zucci Textiles Ltd. (ITA No.1286 of 2014) for A.Y. 2008-09 supports the case of the assessee. The said judgement was followed in the case of Carraro India (P.) Ltd. (ITA No.1629/PUN/2013) too. Accordingly, the export incentive needs to be included in the operational income for PLI computation. Thus, the said issue raised in ground no.3 is allowed i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ied out on the basis of the entity level net margin, considering different net margin of the international transaction on the basis of segmental accounts at the later stage would make the entire proceedings carried out infructuous." 22. From the above, it is evident that the ground raised in the appeal of the Revenue relates to the direction of the DRP to grant proportionate adjustments since the entity level margins are considered and approved by the DRP. 23. In this regard, the assessee made a written submission relying on plethora of decisions including that of own case for the assessment year 2012-13 in favour of restricting the quantification of adjustment value of international transactions only. Referring to the decision of the Tribunal in assessee's own case for the assessment year 2007-08 vide ITA No.1682/PUN/2011, ld. Counsel submitted that the contents of para 37 is relevant. Further, the fact that the Tribunal decided the similar issue in favour of the assessee in the assessment years 2008-09 and 2009-10 vide ITA No.335/PUN/2013 (para 21) and ITA No.337/PUN/2014 (para 12) was also relied. As per the said precedents in assessee's own case such matter stands remitte....