IN THE ITAT MUMBAI BENCH ‘K’
Givaudan Flavours (India) (P.) Ltd.
Deputy Commissioner of Income-tax – 1(3), Mumbai
Rajendra Singh, ACCOUNTANT MEMBER
AND VIJAY PAL RAO, JUDICIAL MEMBER
IT Appeal No. 3925 (Mum.) of 2012
[ASSESSMENT YEAR 2007-08]
JANUARY 30, 2013
Rajendra Singh, Accountant Member
This appeal by the assessee is directed against the order dated 19.3.2012 of CIT(A) for the assessment year 20027-08. The disputes raised by the assessee in this appeal relate to transfer pricing adjustment and allowability of claim of bad debt.
2. We first take up the issue relating to transfer pricing (TP) Adjustment. The AO during the assessment proceedings noted that the assessee had international transactions with 10 associate enterprises (AEs) which included import of raw material at Rs.12.91 crores . The gross receipts of the business were Rs.139.48 crores and operating cost before tax at Rs.131.64 crores giving operating margin of 5.62%. The AO, therefore, referred the determination of arms length price in relation to international transactions to TPO. The TPO asked the assessee to submit information in support of ALP for international transactions. The assessee conducted TP study using TNMM method in respect of purchase of raw material from associate enterprise in which 12 comparables were selected which gave weighted average margin of 5.20 %. The assessee had conducted study on the basis of data of last three years. The TPO, therefore, asked the assessee to submit report on the basis of data for the financial year 2006-07 which was submitted by the assessee giving weighted average margin of 7.97%. The assessee submitted that the margin declared by the assessee was within 5% range and, therefore, no adjustment was required to be made.
2.1 The TPO however noted that four out of the 12 comparables selected by the assessee i.e. Pee CeeCosma Scope Ltd., Hipolin Ltd., AderMultiproducts Ltd. and Godrej Industries Ltd. which were engaged in the business of cosmetics, toiletries, shaving cream, detergents and personal care products were not comparable to the business of the assessee which was manufacture of perfumes and fragrances etc. The TPO therefore, excluded these products but included Khattri Fragrances &Flavours Ltd. which was in the same business. The objection raised by the assessee against Khattri Fragrances and Flavours on the ground that the same was not a going concern was rejected by the TPO after observing that the manufacturing activity had been suspended only at the fag end of the year and in the preceding four years the party had been consistently showing operating margins on 28-30%. The AO thus computed the ALP on the basis of nine comparables which gave average profit margin of 13.81%. Applying the said margin, the TPO computed the total expenses at the enterprise level of Rs. 120.21 crores against the total expenses of Rs. 131.64 crores claimed by the assessee. The difference of Rs. 11,42,21,880/- was therefore, proposed to be added on account of TP adjustment as import of raw material of Rs. 12.91 crores was beyond the safe labour limit of 5%. The AO therefore, following report of TPO and after giving opportunity of hearing to the assessee made adjustment of Rs.11,42,21,880/- on account of purchases from associate enterprises.
3. In appeal CIT(A) confirmed the adjustment made by AO. CIT(A) observed that in assessment year 2006-07, the TP adjustment issue had been set aside by the Tribunal to AO which showed that the Tribunal had not accepted the finding of CIT(A) in assessment year 2006-07. CIT(A) thus confirmed the order of AO aggrieved by which the assessee is in appeal before the Tribunal.
4. We have heard both parties in the matter. Both the parties agreed that the same issue has already been decided by the Tribunal in assessee’s own case in assessment year 2006-07 in ITA No.4820/M/09 and the matter has been restored to the AO. We find that in assessment year 2006-07 also, the AO based on the report of TPO had made adjustment to the entire purchases including domestic purchases applying the enterprise level margin. In appeal, CIT(A) deleted the addition. In further appeal, the Tribunal observed that enterprise level profit margin had been applied in relation to international transactions with AEs which was not correct. The assessee had argued that the limited issue before the Tribunal was whether adjustment could be made to the entire purchases or to only the international transactions. The Tribunal observed that though the issue whether enterprise level margin can be applied to international transactions was not there, the Tribunal could not give its stamp of approval to the method followed which was patently illegal. The Tribunal had power to enforce correct provisions of law. The Tribunal also referred to the decision of the Tribunal in case of Addl. CIT v. TejDiam 37 SOT 341 (Mum.)in which it has been held that TNMM method required comparison of net profit margin realized from international transactions or aggregate of international transactions and not comparison of operating margins of the enterprises. The Tribunal therefore restored the issue to the file of AO for fresh adjudication in accordance with law. The facts this year admittedly are identical. Therefore we set aside the order of CIT(A) and restore the matter back to the file of AO for passing a fresh order in accordance with law after allowing opportunity of hearing to the assessee.
5. The second dispute is regarding allowability of claim of bad debt amounting to Rs. 40,04,230/-. The assessee had not made claim in the return of income but the claim was made during the course of assessment proceedings. The AO apparently did not consider the claim as there is no specific mention of the claim in the assessment order. In appeal, the assessee submitted before CIT(A) that it had written off an amount of Rs. 40,04,230/- as bad debt in the books of account of assessment year 2007-08 and income pertaining to the same had been taken into consideration in the computation of income in the earlier years. It was also submitted that the AO had not considered the claim as claim had not been made in the return of income. It was pointed out that though the AO could not consider any claim otherwise than by way of filing return of income in view of the judgment of Hon’ble Supreme Court in the case of Goetz India Ltd. v. CIT  157 Taxman 1, the appellate authorities had power to entertain such claim. CIT(A) however did not accept the contentions raised. It was observed by him that the AO and CIT(A) had co-terminus jurisdiction and therefore, what was true and applicable to AO was also applicable to CIT(A). CIT(A) therefore, upheld the order of AO aggrieved by which the assessee is in appeal before the Tribunal.
5.1 We have heard both parties, perused the records and considered the matter carefully. The dispute is regarding allowability of claim of bad debt not made in the return of income. The claim had been made before AO only during assessment proceedings which had not been allowed following the judgment of Hon’ble Supreme Court in the case of Goetz India Ltd. (supra) in which it has been held that any claim before the AO has to be made by way of filing revised return if not made in the original return. CIT(A) has therefore, upheld the order of AO. It may however be noted that the judgment of the Hon’ble Supreme Court in the case of Goetz (I) Ltd. was regarding claim to be made before the AO. The Hon’ble Supreme Court in the said case have clarified that the said judgment would not apply to the appellate authority which could entertain the claim using their appellate powers. Facts relating to the claim are already on record with the AO. We, therefore, admit the claim as a question of law does arise on the basis of facts on record as to whether the claim could be allowed. Since the factual aspects regarding fulfilment of condition for allowability of bad debt claim have not been examined, we restore the issue to the file of AO for adjudicating the same after examination of records and after allowing opportunity of hearing to the assessee.
6. In the result, appeal of the assessee is allowed for statistical purposes.