Global Green Company Ltd Vs DCIT (ITAT Delhi)
Held that internal CUP [internal Comparable Uncontrolled Price Method] is the most appropriate method for undertaking the determination of Arm’s Length Price.
Facts- Global Green Company Limited (GGCL) is engaged in the business of ‘processing and export of pickled Gherkins (Baby cucumber). 68.8% of the shares of the assessee company are held by M/s Bilt Trading & Infrastructure Pvt. Ltd. In turn, the assessee is a 100% holding company of Tiffy International BV(Tiffy), with whom it had undertaken international transactions.
The assessee company has relied upon Comparable Uncontrolled Price Method (CUP) as per From 3CEB submitted with the return of income and while determining the arm’s length price in respect of the purchase of packing and processing material, on its own revised the price upward.
The TPO held that the documentation does not contain any indication and material as to how the CUP has been applied by the assessee company. The TPO also held that after going through the Transfer Pricing report it could not be ascertained whether the assessee company is relying upon CUP or is intending to apply Transactional Net Margin Method (TNMM).
Out of the total export of Rs. 51 .33 crores during the year under the reference of processed gherkins, the assessee company made total export exports worth 16.93 crores is to the related party (Tiffy International B.V.) and the remaining about 34 crores to unrelated parties.
The TPO determined the ALP of the international transactions of export of gherkin products by the assessee to its AE at Rs.20,14,85,401/- as against Rs .16,93,48,285/- declared by the assessee. Hence, a sum of Rs.3,21,37,116/- was added to the income of the assessee on account of international transaction of export of gherkin products.
AO held that the intention of legislature is to compute the impact of each international transaction, separately on the income of the assessee. In the manner discussed above, the ALP of each international transaction undertaken by the assessee with AE in this category of imports has been computed and wherever the difference between the price charged by the assessee and ALP is more than 5%, such difference has been computed. The AO held that no downward revision of Arm’s length price is permitted and hence setting off is disallowed.
Conclusion- Held that internal CUP is the most appropriate method for undertaking the determination of Arm’s Length Price. Hence, we direct that the economic analysis be conducted afresh by taking into consideration the “like with the like” and following right foreign currency conversion. The AO is also directed to accord reasonable and accurate adjustment to Product characteristics, contractual terms, risk incurred and geographical factors.
FULL TEXT OF THE ORDER OF ITAT DELHI
The present appeals have been filed by the assessee and the Revenue against the orders of ld. CIT(A)-37, New Delhi.
2. The assessee has raised the following grounds of appeal in ITA No. 2232/Del/2017 for A.Y. 2003-04:
“GROUND I: ADDITION OF INVENTORY AMOUNTING TO Rs.74,62,933/-, WHICH WAS WRITTEN OFF BY DEBITING THE SHARE PREMIUM ACCOUNT.
1.1 On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income tax (Appeals), 37, New Delhi [“the CIT(A)”] erred in upholding the order of the Assessing Officer (AO) in enhancing the total income of the Appellant by the amount of inventory written off amounting to Rs. 74,62,933/- by debiting the securities premium account, even though the said write-off was neither debited to the profit and loss account nor claimed as deduction while computing the total income of the Appellant.
1.2 The Appellant humbly prays that the said addition made by the AO be deleted.
GROUND II: DISALLOWANCE OF ADMINISTRATION EXPENSES OF Rs. 1,06,74,505/- PAID TO M/S BALLARPUR INDUSTRIES LTD.
2.1 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in disallowing the administration expenses of Rs. 1,06,74,505/- paid by the Appellant to M/s. Ballarpur Industries Limited which was incurred in relation to corporate support services provided by them to the Appellant.
2.2 The Appellant prays that it be held that the said expenses were incurred wholly and exclusively for the purposes of business and hence is allowable in the hands of the Appellant u/s 37(1).
GROUND III: TRANSFER PRICING ADJUSTMENT OF RS. 3,21,37,116/- U/S. 92CA(3) OF THE ACT IN RESPECT OF EXPORT OF GOODS TO ASSOCIATED ENTERPRISE.
3.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the order of the AO/TPO in making transfer pricing adjustment of Rs.3,21,37,116/- in respect of export of goods by the Appellant to its Associated Enterprise (AE).
3.2 The CIT(A) erred in not holding that in absence of application of mind of the AO to the transfer pricing adjustment proposed by the TPO, the assessment order passed by the AO in respect of this addition is bad-in-law u/s. 92CA(4), prior to its amendment vide Finance Act, 2007.
3.3 The Ld. CIT(A) erred in not holding that the approach adopted by the AO/TPO in computing arm’s length price under the comparable uncontrolled price method was unjustified and also does not consider the impact of variation in geographical markets, volume of sales, level of market, date of transaction, etc. between the AES and non-AES, while determining the arm’s length price of the transaction.
3.4 The Ld. CIT(A) erred in upholding the order of the AO/TPO of not allowing the adjustment for permissible variance of 5% range mentioned in proviso to section 92C(2) of the Act.
3.5 The CIT(A) erred in ignoring the effect of negative variation while determining the arm’s length price based on the method adopted by the AO/TPO.
3.6 The CIT(A) erred in ignoring that there were some differences in the functions performed and the risk characterization in respect of transactions between the Appellant and its associated enterprise and with third parties;
3.7 The CIT(A) erred in not holding that the approach of the TPO is flawed and erroneous since the TPO has considered non-comparable grades of products for comparison and made various other arithmetical errors.
3.8 The CIT(A) further erred in not holding that there are more appropriate methods for benchmarking the said transaction.
3.9 Also, the Ld. CIT(A) erred in not holding that the business value chain of the Appellant cannot be disregarded while benchmarking an international transaction and that even if any adjustment is to be made, it cannot exceed the total profit element realized in the entire value chain surrounding the international transaction.
3.10 The Appellant humbly prays that the Transfer Pricing Adjustment made by the AO/TPO be deleted.
3.11 Without prejudice to the above, the Appellant further prays that it be held that the total adjustment on any international transaction cannot exceed the total profit element embedded in the entire value chain encircling the said transaction and accordingly, the said adjustment ought to be deleted.
GROUND IV: TRANSFER PRICING ADJUSTMENT OF Rs.7,90,535/- U/S 92CA(3) OF THE ACT IN RESPECT OF PURCHASE OF PACKING MATERIALS FROM ASSOCIATED ENTERPRISE.
4.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the transfer pricing addition of Rs. 7,90,535/- made by the AO/TPO in respect of transaction of purchase of packing materials from an associated enterprise.
4.2 The Appellant humbly prays that since the purchase price at which the Appellant has entered into the international transaction of purchase of packing material is less than the ALP determined by the TPO, the Appellant has in fact offered higher income in respect of said transaction and accordingly, the said difference in the ALP and the purchase price cannot be added to the total income of the Appellant u/s 92 of the Act.
4.3 Without prejudice to the above, the Appellant prays that the difference between the arm’s length price and the transaction price has been wrongly computed by the TPO as Rs. 790,535 instead of Rs. 602,350/-.
GROUND V: DISALLOWANCE OF PROVISION FOR BAD AND DOUBTFUL FARMER ADVANCES OF RS. 61,86,982/-.
5.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in not adjudicating the issue of deduction of provision for bad and doubtful farmer advances of Rs. 61,86,982.
5.2 The Ld. CIT(A) further erred in not holding that in view of the decision of the Hon’ble Supreme Court in the case of Vijaya Bank vs. CIT (190 taxman 257) (2010), where the provision is rightly made by debiting the amount of bad debt to the profit and loss account so as to reduce the profits of the year and simultaneously, the amount of loans and advances or debtors is reduced and consequently, the provision account stands obliterated, then there was actual write off and therefore, the same is allowable under the provisions of the Act.
5.3 The Appellant humbly prays that it be held that the provision for bad and doubtful farmers advances is allowable as deduction/business loss under the provisions of the Act.
GROUND VI: DISALLOWANCE OF PROVISION FOR TRADE DEBTS OF RS. 14,39,391/-.
6.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in not adjudicating the issue of deduction of provision for bad and doubtful trade debtors of Rs. 14,39,391/-.
6.2 The Ld. CIT(A) further erred in not holding that in view of the decision of the Hon’ble Supreme Court in the case of Vijaya Bank vs. CIT (190 taxman 257) (2010), where the provision is rightly made by debiting the amount of bad debt to the profit and loss account so as to reduce the profits of the year and simultaneously, the amount of loans and advances or debtors is reduced and consequently, the provision account stands obliterated, then there was actual write off and therefore, the same is allowable under the provisions of the Act.
6.3 The Appellant humbly prays that it be held that the provision for bad and doubtful farmers advances is allowable as deduction/business loss under the provisions of the Act.
GROUND VII: DISALLOWANCE OF PROVISION FOR BAD AND DOUBTFUL ADVANCES OF RS.12,12,000/-.
7.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in not adjudicating the issue of deduction of provision for bad and doubtful other advances of Rs. 12,12,000/-.
7.2 The Ld. CIT(A) further erred in not holding that in view of the decision of the Hon’ble Supreme Court in the case of Vijaya Bank vs CIT (190 taxman 257) (2010), where the provision is rightly made by debiting the amount of bad debt to the profit and loss account so as to reduce the profits of the year and simultaneously, the amount of loans and advances or debtors is reduced and consequently, the provision account stands obliterated, then there was actual write off and therefore, the same is allowable under the provisions of the Act.
7.3 The Appellant humbly prays that it be held that the provision for bad and doubtful advances is allowable as deduction/business loss under the provisions of the Act.
GROUND VIII: DISALLOWANCE OF EMPLOYEES’ CONTRIBUTION TO PROVIDENT FUND OF RS.33,80,326/-.
8.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in not adjudicating the issue of disallowance of employees’ contributions of Rs. 33,80,326/- to Provident Fund.
8.2 The Appellant humbly prays that it be held that the employees’ contributions to Provident Fund is allowable as deduction/business loss under the provisions of the Act since the same was deposited within the due date of filing of return of income as required by the first proviso to section 438 of the Act.
GROUND IX: DISALLOWANCE OF EMPLOYER’S CONTRIBUTION TO PROVIDENT FUND OF RS. 33,80,326/-.
9.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in not adjudicating the issue of disallowance of employer’s contributions of Rs. 33,80,326/- to Provident Fund.
9.2 The Appellant humbly prays that it be held that the employer’s contributions to Provident Fund is allowable as deduction/business loss under the provisions of the Act since the same was deposited within the due date of filing of return of income as required by the first proviso to section 43B of the Act.
GROUND X: DISALLOWANCE OF EMPLOYEES’ CONTRIBUTION TO EMPLOYEE STATE INSURANCE CORPORATION OF RS. 91,935/-.
10.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in not adjudicating the issue of disallowance of employees’ contributions of Rs. 91,935/-to Employee State Insurance Corporation.
10.2 The Appellant humbly prays that it be held that the employees’ contributions to Employee State Insurance Corporation is allowable as deduction/business loss under the provisions of the Act since the same was deposited within the due date of filing of return of income as required by the first proviso to section 43B of the Act.
GROUND XI: DISALLOWANCE OF EMPLOYER’S CONTRIBUTION TO EMPLOYEE STATE INSURANCE CORPORATION OF RS. 2,16,888/-.
11.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in not adjudicating the issue of disallowance of employer’s contributions of Rs. 2,16,888/-to Employee State Insurance Corporation.
11.2 The Appellant humbly prays that it be held that the employer’s contributions to Employee State Insurance Corporation is allowable as deduction/business loss under the provisions of the Act since the same was deposited within the due date of filing of return of income as required by the first proviso to section 438 of the Act.
GROUND XII: ADDITION OF PROVISION FOR BAD AND DOUBTFUL FARMER ADVANCES OF RS. 1,56,84,359/- TO THE BOOK PROFITS U/S. 115JB.
12.1 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the order of the AO of treating the provision for bad and doubtful farmer advances of Rs. 1,56,84,359 as provision for diminution in value of assets and thereby, adding the same to the book profits u/s. 115JB of the Act.
12.2 The Ld. CIT(A) further erred in not holding that where the provision is rightly made by debiting the amount of bad debt to the profit and loss account so as to reduce the profits of the year and simultaneously, the amount of loans and advances or debtors is reduced and consequently, the provision account stands obliterated, then such provision should be regarded as an actual write off and accordingly, cannot be regarded as provision for diminution in value of assets.
12.3 The Appellant humbly prays that the foregoing addition of provision for bad and doubtful farmer advances (which were netted off against advances in the books of the Appellant) to the book profit u/s. 115JB be deleted.
WITHOUT PREJUDICE TO THE GROUND XII, GROUND XIII: ADDITION OF PROVISION FOR BAD AND DOUBTFUL FARMER ADVANCES OF RS. 1,56,84,359/-TO THE BOOK PROFITS U/S. 115JB BE RESTRICTED TO RS. 61,86,982/-
13.1 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not restricting the addition of provision for bad and doubtful farmer advances of Rs. 1,56,84,359/- to RS. 61,86,982/-, which is actual amount of provision created during the year, debited to the profit and loss account and claimed as deduction while computing the book profit.
13.2 The Appellant humbly prays that if the addition of provision for doubtful farmer advances to the book profit is upheld, the said addition should be restricted to only Rs. 61,86,982, since the Appellant had claimed only that amount as deduction.
GROUND XIV: ADDITION OF PROVISION FOR BAD AND DOUBTFUL TRADE DEBTORS OF RS. 14,39,391 TO THE BOOK PROFITS U/S. 115JB.
14.1 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the order of the AO of treating the provision for bad and doubtful trade debtors of Rs. 14,39,391 as provision for diminution in value of assets and thereby, adding the same to the book profits u/s. 115JB of the Act.
14.2 The Ld. CIT(A) further erred in not holding that where the provision is rightly made by debiting the amount of bad debt to the profit and loss account so as to reduce the profits of the year and simultaneously, the amount of loans and advances or debtors is reduced and consequently, the provision account stands obliterated, then such provision should be regarded as an actual write off and accordingly, cannot be regarded as provision for diminution in value of assets.
14.3 The Appellant humbly prays that the foregoing addition of provision for bad and doubtful trade debtors (which were netted off against debtors in the books of the Appellant) to the book profit u/s. 115JB be deleted.
GROUND XV: ADDITION OF PROVISION FOR BAD AND DOUBTFUL ADVANCES OF RS. 12,12,000 TO THE BOOK PROFITS U/S. 115JB.
15.1 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the order of the AO of treating the provision doubtful advances of Rs. 12,12,000 as provision for diminution in value of assets and thereby, adding the same to the book profits u/s. 115JB of the Act.
15.2 The Ld. CIT(A) further erred in not holding that where the provision is rightly made by debiting the amount of bad debt to the profit and loss account so as to reduce the profits of the year and simultaneously, the amount of loans and advances or debtors is reduced and consequently, the provision account stands obliterated, then such provision should be regarded as an actual write off and accordingly, cannot be regarded as provision for diminution in value of assets.
15.3 The Appellant humbly prays that the foregoing addition of provision for doubtful advances (which were netted off against loans and advances in the books of the Appellant) to the book profit u/s. 115JB be deleted.”
3. The revenue has raised the following grounds of appeal in ITA No. 1307/Del/2017 for AY 2007-08:
“1. Whether on the facts and circumstances of the case & in law, the Ld. CIT (A) has erred in deleting the addition of Rs. 28,97,157/- being 50% of total reduction of Rs. 57,94,313/- irrespective of the facts as mentioned by the AO that majority of the stock written off is in the nature of product loss & packing material loss.
2. Whether the Ld CIT (A) was justified in laying down stringent standards of comparability and attempting to identify exact re;ica of the taxpayer for comparability analysis, whereas the Indian Law and the international jurisprudence recognize the reality that there cannot be an exact comparable in a given situation without any differences without appreciation that such astringency will defeat the purpose of flexibility provided in comparability analysis for determination of ALP.”
ITA No. 2232/Del/2017: A.Y. 2003-04 (Assessee) Inventory Written off:
4. At the outset, it was submitted that the assessee has not claimed deduction in the P&L account and hence no disallowance is called for. We are in agreement with the contention of the ld. AR that no disallowance is called for unless claimed in the P&L account. The AO is directed to examine and delete the addition after verification in case the expenditure is not claimed in the P&L account.
Administrative Expenses – Ballarpur Industries:
5. The similar expenses disallowed by the revenue have been allowed by the revenue for A.Y. 2007-08 and A.Y. 2010-11 and by the ITAT vide order dated 19.01.2023 in ITA No. 193 1/Del/2017 for A.Y. 2002-03. In the absence of any change in the factual matrix, we hereby direct that the addition be deleted.
Provision for Bad & Doubtful Debts/Farmers Advance:
6. The AO is directed to allow the amount on write off basis. The assessee shall produce the written off details before the AO.
ESI/PF Contribution:
7. It is contended that out of Rs.33,80,326/- an amount of Rs.25,12,116/- was paid within the due date. The AO may examine the exact details of payment of Employee Contribution & Employer Contribution and disallow the amount not paid within the due date as per the judgment of Hon’ble Apex Court in the case Checkmate Services Pvt. Ltd. Vs. CIT 448 ITR 518.
Section 115J B on provisions for Doubtful Debts:
8. It is submitted that the amount of Rs.1,56,84,359/- be corrected to Rs.61,86,982/-. The AO to pass rectification order after verification.
9. All the debts which have been rightly obliterated even though the terminology used was “provision” was directed to be excluded from the purview of computation of Section 115JB.
Adjustment u/s 92CA(3):
Relevant facts are as under:
10. Global Green Company Limited (GGCL) is engaged in the business of ’processing and export of pickled Gherkins (Baby cucumber). 68.8% of the shares of the assessee company are held by M/s Bilt Trading & Infrastructure Pvt. Ltd. In turn, the assessee is a 100% holding company of Tiffy International BV(Tiffy), with whom if had undertaken international transactions.
11. During the year, the assessee has undertaken the following international transaction:
