FEDEX EXPRESS TRANSPORTATION AND SUPPLY CHAIN SERVICES INDIA P.LTD, MUMBAI V. DCIT (OSD) 8(1), MUMBAI

ITA 435/MUM/2014

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8316 (ITAT-MUMBAI)
• Duration Of Justice: 10 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-12-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 24-07-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 20-01-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AKHILENDA P YADAV
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Bad and doubtful debts; Arm length price
• Section: 234B; 37; 28

Judgement Text

I.T.A.NO.435/MUM/2014 1 , IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE S/SHRI N.K.BILLAIYA, (AM) AND AMIT SHUKLA, (JM) . . , , ./I.T.A.NO.435/MUM/2014 ( ! '# $' / ASSESSMENT YEAR: 2009-10) FEDEX EXPRESS TRANSPORTATION AND SUPPLY CHAIN SERVICES INDIA PRIVATE LIMITED (MERGED FEDERAL EXPRESS INDIA PVT.LTD.) C/O BMR AND ASSOCIATES LLP, 36-B. DR.B.R.SHIRODKAR MARG, PAREL (E), MUMBAI-400012 / VS. DY. COMMISSIONER OF INCOME TAX RANGE 8(1), 2 ND FLOOR, ROOM NO.204 AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 % ./ & ' ./PAN/GIR NO. : AAACF9060G ( %( / APPELLANT) .. ( )* %( / RESPONDENT) %( + / ASSESSEE BY : S/SHRI AJIT KUMAR JAIN & JITENDRA JAIN )* %( , + /REVENUE BY : SHRI AKHILENDA P YADAV - , . / DATE OF HEARING : 18.9.2014 /0$# , . /DATE OF PRONOUNCEMENT : 10.12.2014 / O R D E R PER AMIT SHUKLA(JM) THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AG AINST THE FINAL ASSESSMENT ORDER DATED 30.12.2013, PASSED UNDER SE CTION 144(3) R.W.S. 1444(13) OF THE INCOME TAX ACT, 1961 (THE ACT) IN PURSUANCE OF DIRECTION GIVEN BY DRP FOR THE ASSESSMENT YEAR 2009-10. 2. IN THE GROUNDS OF APPEAL, THE ASSESSEE HAS RAISE D FOLLOWING GROUNDS : 1. THE LEARNED AO ERRED IN PASSING THE ASSESSMENT ORDER AGAINST FEDERAL EXPRESS INDIA PRIVATE LIMITED WHICH IS BAD IN LAW, NULL AND VOID- AB-INITIO SINCE ON THE DATE OF PASSING THE ASSESSME NT ORDER, FEDERAL I.T.A.NO.435/MUM/2014 2 EXPRESS INDIA PRIVATE LIMITED WAS NOT IN EXISTENCE ON ACCOUNT OF MERGER WITH THE APPELLANT . 2. TRANSFER PRICING ADJUSTMENT OF RS 1,55,35,432/- THE LEARNED TPO. THE HON'BLE DRP AND THE LEARNED AO ERRED IN: 2.1 RECOMMENDING A TRANSFER PRICING ADJUSTMENT IN R ESPECT OF MARK UP TO BE EARNED BY THE APPELLANT ON PAYMENTS MADE TO THIR D PARTY SERVICE PROVIDERS TOWARDS CUSTOM CLEARANCE OF HIGH VALUE PA CKAGES; 2.2 ERRONEOUSLY COMPUTING THE MARK-UP TO BE EARNED BY THE APPELLANT ON PAYMENTS MADE TO THIRD PARTY SERVICE PROVIDERS AS P ER THE AGREEMENT ENTERED INTO BETWEEN THE APPELLANT AND ITS AE WITHO UT APPRECIATING THE INTENT OF AGREEMENT AND THE IMPLICIT ARRANGEMENT BE TWEEN THE PARTIES: 2.3 IN ERRONEOUSLY COMPUTING A MARK-UP TO BE EARNED BY THE APPELLANT ON PAYMENTS MADE TO THIRD PARTY SERVICE PROVIDERS WITH OUT CONSIDERING THE ARM'S LENGTH MARGIN OF COMPARABLE COMPANIES; 2.4 IN ERRONEOUSLY COMPUTING A MARK-UP TO BE EARNED BY THE APPELLANT ON PAYMENTS MADE TO THIRD PARTY SERVICE PROVIDERS WITH OUT CONSIDERING THE ARM'S LENGTH MARGIN OF COMPARABLE COMPANIES HAVING SIMILAR PASS THROUGH COSTS; 2.5 IN FAILING TO APPRECIATE THAT EVEN IF THE PAYME NTS MADE TO THIRD PARTY SERVICE PROVIDERS WERE TO BE CONSIDERED AS PART OF THE OPERATING REVENUE AND OPERATING EXPENSE EARNED / INCURRED BY THE APPE LLANT TOWARDS COORDINATION OF CUSTOM CLEARANCE SERVICES FOR HIGH VALUE PACKAGES, THE FEE RECEIVED BY THE APPELLANT FROM ITS ASSOCIATED E NTERPRISE ('AE') FOR SUCH SERVICES IS AT ARMS LENGTH BY VIRTUE OF PROVISO TO SECTION 92C(2) OF THE ACT; 2.6 NOT CONSIDERING AND NOT GIVING ANY FINDINGS ON THE ALTERNATIVE SUBMISSIONS PREFERRED BY THE APPELLANT BEFORE THE H ON'BLE DRP. 3. DISALLOWANCE OF BAD DEBTS WRITTEN OFF! BUSINESS LOSS OF RS 28,76,102 THE HON'BLE DRP AND THE LEARNED AO ERRED IN: 3.1 NOT ALLOWING THE ENTIRE AMOUNT WRITTEN OFF OF R S 28,76,102 AS A DEDUCTION UNDER SECTION 36(1 )(VII) OF THE ACT; 3.2 NOT CONSIDERING AND NOT GIVING ANY FINDINGS ON THE ALTERNATIVE CLAIM OF THE APPELLATE THAT RS.28,76,102/- SHOULD BE TREATED AS A BUSINESS LOSS UNDER SECTION 28 READ WITH SECTION 37 OF THE ACT AN D ALLOWED AS A DEDUCTION. 4. THE LD. AO ERRED IN NOT GRANTING CREDIT FOR TAX ES DEDUCTED AT SOURCE AMOUNTING TO RS.27,55,636/- AND CONSEQUENTIA L LEVY OF INTEREST UNDER SECTION 234B AND 234C OF THE ACT I.T.A.NO.435/MUM/2014 3 3. AT THE OUTSET, LD. COUNSEL, SHRI AJIT JAIN SUB MITTED THAT GROUND NO.4 RAISED BY THE ASSESSEE IS NOT PRESSED. ACCORDINGL Y, THE SAME IS TREATED AS DISMISSED AS NOT PRESSED. 4. THE MAIN ISSUE INVOLVED IN THIS APPEAL HAS BEE N RAISED IN GROUND NO.2, WHICH IS TRANSFER PRICING ADJUSTMENT OF RS 1,55,3 5,432/-. THE BRIEF FACTS OF THE CASE QUA THIS ADDITION ARE THAT, THE ASSESSEE, M/ S FEDERAL EXPRESS (INDIA) PVT.LTD (NOW MERGED WITH FEDEX EXPRESS TRANSPORTATI ON AND SUPPLY CHAIN SERVICES INDIA PRIVATE LIMITED) IS A WHOLLY OWNED SUBSIDIARY OF FEDERAL EXPRESS CORPORATION, (HEREINAFTER REFERRED TO AS FEC). THE FEC HAS BEEN GRANTED APPROVAL BY DIRECTOR GENERAL OF CIVIL AVIATION TO OPERATE ALL CARGO AIR SERVICES TO AND FROM INDIA. IT HAS BRANCHES IN MAJOR CITIES IN INDIA AND THE OPERATION INCLUDED TRANSPORTATION AND DELIVERY OF INTERNATION AL PRIORITY PACKAGES AND FREIGHT. THE ASSESSEE COMPANY WAS MOSTLY ENGAGED IN PROVIDIN G CUSTOM CLEARANCE SERVICE TO FEC, WHICH IS ITS ASSOCIATE ENTERPRIS E (AE) RELATING TO HIGH VALUE PACKAGES AND LOW VALUE PACKAGES. THE ASSESSEE, HOW EVER, HAD LICENSE TO PROVIDE ONLY LOW VALUE SERVICES AND NOT HIGH VALU E PACKAGES. THE HIGH VALUE SERVICES WAS EARLIER RENDERED BY A THIRD PARTY, M/ S JEENA AND CO., WHICH USE TO PROVIDE SERVICES TO THE FEC FOR HIGH VALUE SERVIC ES PRIOR TO 1.4.2006. WHEN THE ASSESSEE COMPANY CAME INTO EXISTENCE IN APRIL, 2006, THE FEC DECIDED THAT THE ASSESSEE WILL CO-ORDINATE WITH JEENA SO THAT GLOBAL STANDARD SERVICES CAN BE PROVIDED TO FEC IN INDIA. THUS, THE ASSESSEE C OMPANY BY ITS OWN AND WITH THE COORDINATION OF M/S JEENA PROVIDED FOLLOWING SE RVICES TO ITS AE IN INDIA: I) PROVISION OF CUSTOM CLEARANCE SERVICES FOR LOW V ALUE PACKAGES.: THESE SERVICES WERE ESSENTIALLY IN THE NATURE OF PR EPARING AND FILING THE PRESCRIBED DOCUMENTATION AND PAYMENTS OF DUTIES AND TAXES TO THE CUSTOMS AUTHORITIES. THE ASSESSEE IN THE AGREEM ENT WITH FEC AGREED I.T.A.NO.435/MUM/2014 4 TO PROVIDE THESE SERVICES AT COSTS PLUS A MARK-UP OF 14%.. THE RELEVANT PROVISIONS OF THE AGREEMENT HAS BEEN REPRODUCED B Y TPO IN PARA 3.1 OF HIS ORDER. II) COORDINATION OF CUSTOM CLEARANCE SERVICES FOR HIGH VALUE PACKAGES: THESE SERVICES WERE CONDUCTED THROUGH AN INDEPENDENT THIRD PARTY, JEENA FOR THE CLEARANCE OF HIGH VALUE PACKAGES FROM THE CUSTOMS AUTHORITIES, AS THE ASSESSEE DID NOT POSSESS THE RE QUISITE LICENSE. THE ASSESSEE WAS REQUIRED TO FACILITATE AND COORDINA TE WITH FOR THE CLEARANCE OF HIGH VALUE PACKAGES FOR AE, TO ENSURE THAT THE SERVICES WERE UNDERTAKEN IN ACCORDANCE WITH FEC'S GLOBAL STANDARD S. FOR COORDINATING SUCH SERVICES THE ASSESSEE HAD CHARGED COST PLUS M ARK-UP OF 9 PERCENT. III) CUSTOM CLEARANCE FEES: . FOR THE LOW VALUE AND HIGH VALUE TRANSACTIONS, TH E ASSESSEE WAS ENTRUSTED WITH THE TASK OF PAYING APPROPRIATE DUTI ES AND TAXES AT THE TIME OF CLEARANCE OF LOW VALUE AND HIGH VALUE INBOUND SHIPMENTS. FOR SUCH SERVICES, THE ASSESSEE RECEIVES SERVICE FEE, WHICH IS CALCULATED AT 2.5% OF SUCH DUTIES AND TAXES PAID, OR RS.250 PER SHIPM ENT, WHICHEVER IS HIGHER. 4.1 IN THE TRANSFER PRICING REPORT AND IN FORM NO. 3CEB, THE ASSESSEE HAS REPORTED THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AE: . S NO NATURE OF INTERNATIONAL TRANSACTION FY 2008-09 RS METHOD USED NAME OF THE AE 1 PROVISION OF CUSTOM CLEARANCE SERVICES FOR LOW VALUE PACKAGES 5,85,42,664 TNMM FEDERAL EXPRESS CORPORATION - BRANCH OFFICE ('FEC BO 2 COORDINATION OF CUSTOM OF CLEARANCE SERVICES FOR HIGH VALUE PACKAGES. 37,69,464 TNMM 3 CUSTOM CLEARANCE FEE 289,83,056 CUP 4 CO-ORDINATION OF BACK-UP OPERATION 89,81,719 TNMM FEDERAL EXPRESS EUROPEAN SERVICES INC (FCC) I.T.A.NO.435/MUM/2014 5 THE SEGMENTAL ACCOUNTS OF THE ASSESSEE, REVEALED TH E FOLLOWING DETAILS OF REVENUE, COST AND MARK-UP : ALL AMOUNTS IN RS. PARTICULARS CUSTOM CLEARANCE FOR LOW VALUE (MARK-UP) 14% CUSTOMS CLEARANCE FOR HIGH VALUE (JENA) CUSTOM CLEARANCE ADVANCEMENT FEE BACK OFFICE OPERATION (WNS) AS PER P&L ACCOUNT COST 5,13,53,214 34,58,224 2,06,63,940 82,40,110 8,37,15,488 MARK-UP 71.89,450 3,11,240 7,41,610 82,4,2300 ADVANCEMENT FEES 3,83,97,399 3,83,97,399 TOTAL REVENUE 5.85.42.664 37,69,464 5,90,61,339 89,81,719 13,03,55,186 5. ON THE PERUSAL OF THE PROFIT AND LOSS ACCOUNT, T HE TPO NOTED THAT THE PAYMENT MADE TO JEENA AND THE CUSTOM DUTY WERE NOT REFLECTED IN THE PROFIT AND LOSS ACCOUNT. THESE PAYMENTS WERE AS UNDER :. ALL AMOUNTS IN RS PARTICULARS LOW VALUE GOODS HIGH VALUE GODS CUSTOM DUTY 61,43,04,879 14,62,68,929 PAYMENT TO JEENA 17,26,15,911 THE TPO FURTHER OBSERVED THAT THE ASSESSEE HAS SE LECTED PROFIT LEVEL INDICATOR (PLI) BASED ON COST IN ESTABLISHING ARM LENGTH PROF ITABILITY, WHEREAS WHILE APPLYING MARKUP ON COST, THE ASSESSEE HAS EXCLUDED THE COST IN RESPECT OF PAYMENT MADE TO JEENA AND THE CUSTOM DUTIES. IN RES PONSE TO THE SHOW CAUSE NOTICE AS TO WHY THESE PAYMENTS HAVE NOT BEEN ROUT ED THROUGH PROFIT AND LOSS ACCOUNT, THE ASSESSEE SUBMITTED THAT FOR THE CUSTOM CLEARANCE OF HIGH VALUE PACKAGES, THE ASSESSEE HAS CONTRACTED WITH JEENA WHO RAISED THE BILLS IN TWO COMPONENTS, ONE NON TAXABLE COMPONENTS WHICH COMP RISES OF CUSTOM DUTY AND STAMP DUTY; AND TWO, SERVICE FEE WHICH COMPRIS ES OF WAREHOUSING CHARGES, AIRLINES CHARGES AND AGENCY CHARGES. THE TOTAL PA YMENTS ON ACCOUNT OF PAYMENT OF CUSTOM DUTY WAS RS.14,62,68,929/- AND TH E CLOSING AMOUNT AVAILABLE I.T.A.NO.435/MUM/2014 6 WITH JEENA AS ON 31.3.2009 WAS RS.12,62,354/- THU S , THE PAYMENT OF SERVICE FEE WAS ALSO BASED ON INVOICES RAISED BY JEENA. T HIS ADVANCE GIVEN TO JEENA WAS ALSO ROUTED THROUGH BALANCE SHEET OF THE ASSES SEE AND THE BALANCE IN THIS ACCOUNT AS ON 31.3.2009 WAS RS.1,36,33,233/-. ON THIS, THE TPO OBSERVED THAT THE ASSESSEE HAS NOT ACCOUNTED FOR THE PAYMENT MADE TO JEENA IN ITS COST BASE, WHILE APPLYING THE MARKUP. THE TPO EXAMINED THE OECD GUIDELINES ON INTRA GROUP SERVICES, PASS THROUGH EXPENSES AND CO ST PLUS MARK-UP USED IN TNMM. THE RELEVANT PART OF THE SAID GUIDELINES HAS BEEN REPRODUCED BY THE TPO AT PAGES 6 TO 9 OF HIS ORDER. THE TPO HAS AL SO TAKEN NOTE OF THE AGREEMENT ARRIVED BETWEEN THE ASSESSEE AND JEENA E NTERED ON 1.4.2006, WHICH WAS FURTHER AMENDED ON 11.9.2008. THE RELEVANT POR TION OF THE SAID AGREEMENT HAS ALSO BEEN INCORPORATED BY THE TPO AT PAGES 9 A ND 10 OF HIS ORDER. FROM THE TERMS OF THE AGREEMENT, THE TPO DEDUCED THAT T HE ASSESSEE HAD DIRECT CONTROL AND MONITORING OF DAY TO DAY ACTIVITIES O F JEENA AND ASSESSEE COULD NOT GIVE ANY PROPER REASONS FOR EXCLUDING THESE PAYM ENTS WHILE CONSIDERING THE COST BASE FOR APPLYING THE MARKUP. FURTHER THE AS SESSEE COMPANY HAS PAID THE AMOUNT OF RS.17,26,15,911/- TO JEENA WHICH HAS BEE N ROUTED THROUGH THE BALANCE SHEET AND DOES NOT FORM PART OF THE PROFIT AND LOSS ACCOUNT, EVEN THOUGH THE DUTY HAS BEEN DEDUCTED. IN THE PROFIT AND LOSS ACCOUNT, THE ASSESSEE HAD SHOWN THE FOLLOWING COST AND MARKUP : AMOUNTS IN RS. PARTICULARS CUSTOM CLEARANCE FOR LOW VALUE (MARK-UP) 14% CUSTOMS CLEARANCE FOR HIGH VALUE (JENA) BACK OFFICE OPERATION (WNS) CUSTOM CLEARANCE ADVANCEMENT FEE AS PER P&L ACCOUNT COST 5,13,53,214 34,58,224 8240110 2,06,63,940 8,37,15,488 MARK-UP 71.89,450 3,11,240 7,41,610 82,4,2300 I.T.A.NO.435/MUM/2014 7 THUS, THE ASSESSEE HAS ONLY TAKEN THE COST OF CUS TOM CLEARANCE FOR HIGH VALUE (JEENA ) AT RS.34,58,224/- AND MARK UP OF RS.3,11 ,240/-. THE TPO HELD THAT THE MARKUP OF 9% SHOULD HAVE BEEN APPLIED BY THE AS SESSEE ON THE ENTIRE COST OF HIGH VALUE SERVICES AS THE PAYMENT TO JEENA CAN NOT BE A PASS THROUGH COST AS STATED BY THE ASSESSEE. 5.1 HE ACCORDINGLY MADE THE TRANSFER PRICING ADJ USTMENT ON THE TOTAL COST IN ACCORDANCE WITH THE CUSTOM CLEARANCE FOR HIGH VALUE CO-ORDINATED THROUGH JEENA IN THE FOLLOWING MANNER: CUSTOM CLEARANCE FOR HIGH VALUE (JEENA AMOUNT IN RS. COST (AS PER P&L A/C) 34,58,224 PAYMENT MADE TO JEENA 17,26,15,911 TOTAL COST 17,60,74,135 MARK-UP OF 9% ON TOTAL COST (ARM LENGTH PRICE) 1,5 8,46,672 PRICE CHARGED BY THE ASSESSEE 3,11,240 ADJUSTMENT 1,55,35,432 6. SUCH AN ADJUSTMENT HAS BEEN CONFIRMED BY THE D RP IN THEIR DIRECTION TO THE AO,, WHICH HAS BEEN DEALT IN DETAIL IN PARA GRAPHS 2.3.1 AND 2.3.2 OF THE DRPS ORDER. 7. BEFORE US, THE LD. COUNSEL SHRI AJIT JAIN, AFTER STATING THE ENTIRE FACTS OF THE CASE, SUBMITTED THAT THE ISSUE INVOLVED IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE, BY THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF LI AND FUNG INDIA PVT LTD V/S CIT IN INCOME TAX APPEAL NO .306 OF 2012, JUDGMENT AND ORDER DATED 16.12.2013, WHEREIN THE HONBLE HIGH CO URT HAS HELD THAT SUCH AN ADJUSTMENT BY APPLYING THE MARK-UP ON THE COST OF THE THIRD PARTY FOR DETERMINING ARM LENGTH MARGIN OF THE ASSESSEE CANNO T BE UPHELD. HE SUBMITTED THAT FEC WAS CONDUCTING ITS BUSINESS OF H IGH VALUE CUSTOMERS EARLIER THROUGH JEENA AND CO, EVEN PRIOR TO THE EXISTENCE OF THE ASSESSEE. WHEN THE I.T.A.NO.435/MUM/2014 8 ASSESSEE COMPANY WAS FORWARD IN THE YEAR 2006, THIS ARRANGEMENT WAS UNDERTAKEN BY THE ASSESSEE ONLY FOR ADMINISTRATIVE CONVENIENCE AND ALSO TO ENSURE GLOBAL STANDARD SERVICES. FOR CO-ORDINATING SUCH SERVICES IN CONNECTION WITH CUSTOM CLEARANCE OF HIGH VALUE PACKAGES WITH JEENA, THE ASSESSEE HAS EARNED RS.3,11,240/- WHICH WAS COMPUTED BY APPLYIN G MARK-UP 9% ON THE ACTUAL COST OF RS.34,58,222/-. UNDER THESE CIRCUM STANCES, THE AE HAS REIMBURSED THE PAYMENT MADE BY ASSESSEE TO JEENA, A MOUNTING TO RS.31,88,84,840/- OUT OF WHICH, RS. 14,62,68,929/- RELATED TO CUSTOM DUTY PAID BY JEENA AND BALANCE AMOUNT OF RS. 17,26,15,911/- RELATED TO THE SERVICE FEE CHARGED BY JEENA TOWARDS CUSTOM CLEARANCE SERVICES . THE ENTIRE PAYMENT WAS PURELY PASS THROUGH COST AND NO ELEMENT OF SERVICES BY THE ASSESSEE WAS INVOLVED. IN OTHER WORDS, THE SERVICES WERE RE NDERED BY JEENA FOR WHICH PAYMENT WAS MADE BY THE ASSESSEE WHICH WAS FULLY RE IMBURSED BY THE AE. THUS, THERE WAS NO ELEMENT OF ANY MARKUP ON THE COS T. WHATEVER SERVICES ASSESSEE HAS RENDERED FOR CO-ORDINATING WITH JEENA , IT HAS CHARGED MARK-UP. IT WAS ON ACCOUNT OF THESE FACTS AND REASONS, THE PAY MENT MADE TO JEENA, WERE ROUTED THROUGH BALANCE SHEET OF THE ASSESSEE. MR. A JIT JAIN SUBMITTED THAT ON SIMILAR FACTS AND CIRCUMSTANCES, THE HONBLE DELH I HIGH COURT HAS HELD THAT SUCH ON APPLICATION OF MARKUP FOR THE PAYMENT MA DE TO THIRD PARTY OR THE COST OF RELATING TO THIRD PARTY CANNOT BE UPHELD. HE ALSO POINTED OUT THE RELEVANT PARAGRAPHS OF THE SAID DECISION. 8. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT AS PER THE AGREEMENT WITH AE, THE ASSESSEE WAS REQUIRED TO RENDER SERVICES F OR WHICH IT WAS ENTITLED TO COST + MARKUP OF 14% ON LOWER VALUE SERVICES AND 9% IN RESPECT OF HIGH VALUE SERVICES. EVEN THOUGH THE ASSESSEE HAD ENTERED IN TO AN AGREEMENT WITH JEENA I.T.A.NO.435/MUM/2014 9 FOR RENDERING HIGH VALUE SERVICES, THE ASSESSEE WA S HAVING DIRECT CONTROL OF SUCH SERVICES AND THEREFORE, THE ASSESSEE WERE REQUIRED TO SHOW MARK UP OF 9% ON SUCH SERVICES. REGARDING THE DECISION OF THE HON BLE DELHI HIGH COURT, HE SUBMITTED THAT THE SAME WILL NOT BE APPLICABLE TO THE FACTS AND CASE OF THE ASSESSEE AS THE FACTS WERE QUITE DIFFERENT. THU S, HE STRONGLY RELIED UPON REASONS GIVEN IN THE ORDER OF TPO. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE RELEVANT FINDINGS GIVEN BY TPO AS WELL AS BY THE DRP AND ALSO MATERIAL PLA CED ON RECORD. THE ASSESSEE IS MAINLY RENDERING CUSTOM CLEARANCE SERVI CES OF LOW VALUE PACKAGES AND ALSO COORDINATING CUSTOM CLEARANCE SERVICES IN RESPECT OF HIGH VALUE BOUND SERVICES. AS PER THE AGREEMENT WITH THE AE THE ASSESSEE, FOR THE LOW VALUE SERVICES, WAS CHARGING MARK-UP OF 14% OVER THE COS T AND FOR THE HIGH VALUE SERVICES, IT WAS ENTITLED FOR MARK-UP 9% OVER THE COST OF VALUE. SO FAR AS, THE LOW VALUE SERVICES ARE CONCERNED, THERE IS NO DISPU TE. ADMITTEDLY, FOR THE PROVISIONS OF CUSTOM CLEARANCE SERVICES FOR HIGH V ALUE PACKAGES , THE ASSESSEE DID NOT HAD THE REQUISITE LICENSE FROM THE COMPET ENT AUTHORITY. PRIOR TO THE ASSESSEE, THE AE, (FEC) WAS AVAILING SUCH SERVICES FROM AN INDIAN THIRD PARTY, M/S JEENA AND CO. AND AFTER 1.4.2006, WHEN THE ASS ESSEE CAME INTO EXISTENCE, THE AE DECIDED THAT THE ASSESSEE WILL CO-ORDINATE WITH JEENA FOR CUSTOMER CLEARANCE SERVICES FOR HIGH VALUE PACKAGES. UNDE R THIS SEGMENT OF SERVICES THE ASSESSEE USE TO ADVANCE MONEY TO JEENA FOR THE PURP OSE OF PAYMENT OF CUSTOM DUTY AND PAYMENT OF SERVICE FEE WHICH WAS ADJUSTED AGAINST THE BILLS RAISED BY JEENA. THIS ENTIRE AMOUNT PAID BY THE ASSESSEE WAS REIMBURSED BY THE AE TO THE ASSESSEE. IN THIS YEAR, TOTAL PAYMENT OF RS.3 1,88,84,840/- WAS MADE TO JEENA, WHICH CONSISTED OF CUSTOM DUTY PAID BY JEEN A AND ALSO SERVICE FEE I.T.A.NO.435/MUM/2014 10 CHARGED BY JEENA. THIS ENTIRE AMOUNT WAS ROUTED T HROUGH BALANCE SHEET, AS THE ASSESSEE WAS NOT DIRECTLY RENDERING ANY SERVICE S BUT WAS GETTING SUCH SERVICES DONE THROUGH JEENA. THUS IT WAS MERELY A PASS THROUGH COST AND NO ELEMENT OF SERVICE BY THE ASSESSEE WAS INVOLV ED. FOR CO-ORDINATING THE SERVICES WITH JEENA, THE ASSESSEE HAS SEPARATELY E ARNED A FEE OF RS.3,11,240/- FROM ITS AE WHICH WAS COMPUTED BY APPLYING THE MA RKUP 9% ON THE ACTUAL COST OF RS.34,58,224/- INCURRED BY THE ASSESSEE. THIS AMOUNT WAS ROUTED THROUGH PROFIT AND LOSS ACCOUNT. THE DEPARTMENTS CASE IS THAT, SO FAR AS PAYMENT OF SERVICE FEE IS CONCERNED WHICH WAS PAID TO JEENA (WHICH IS THE THIRD PARTY) FOR WHICH TOTAL COST INCURRED WERE RS.17,60,74,135/-, MARK-UP OF 9% SHOULD HAVE BEEN EARNED BY THE ASSESSEE ON SUCH COSTS ALSO AND THIS WOULD HAVE MET THE ARMS LENGTH REQUIREMENT AND HENCE THE ARM LENGTH PRICE OF SUCH COSTS OF SERVICES. ACCORDINGLY, ADJUSTMENT HAS BEEN MADE ON SUCH COST OF SERVICES RENDERED BY JEENA. THIS ENTIRE TREATMENT HAS BE EN GIVEN ON THE PREMISE THAT THE ASSESSEE COMPANY WAS MONITORING THE ENTIRE ACTI VITIES OF THE JEENA ON CUSTOMS CLEARANCE SERVICES FOR HIGH VALUE PACKAGES. 10. NOW, THE ISSUE BEFORE US IS, WHETHER THE MARK- UP OF THE COST OF THE SERVICES RENDERED BY THE THIRD PARTY CAN BE APPLIED FOR DETERMINING THE ALP IN THE HANDS OF THE ASSESSEE. THIS IS ALSO TO BE E XAMINE FROM THE ANGLE, WHETHER FOR CO-ORDINATING HIGH VALUE SERVICES, THE ASSESSE E IS PERFORMING ANY FUNCTION OR DEPLOYING ANY ASSETS OR HAS BEARED ANY RISKS. FROM THE RECORDS, IT IS EVIDENT THAT FOR CO-COORDINATING CUSTOM CLEARANCE SERVICES ON HIGH VALUE PACKAGES, THE ASSESSEE WAS NOT RENDERING ANY DIRECT SERVICES TO THE AE, BUT WAS GETTING SUCH SERVICES DONE THROUGH THIRD PART Y WHO HAD THE REQUISITE LICENSE. THE ASSESSEES ROLE WAS CONFINED TO MAK ING OF THE PAYMENTS AND TO I.T.A.NO.435/MUM/2014 11 GET THE ENTIRE RE-IMBURSEMENTS OF THE COSTS. IT IS THE JEENA COMPANY WHO HAD CHARGED FOR ITS SERVICES AND THE ASSESSEE HAS MERE LY PASS THROUGH SUCH COST. IN OTHER WORDS, ASSESSEE HAS MERELY DONE CO-ORDIN ATING SERVICES, RATHER THAN PROVIDING FULL FLEDGED SERVICES. THE DEPARTMENTS ALLEGATIONS THAT IT WAS MONITORING JEENAS ACTIVITY DOES NOT PER SE LEAD TO ANY INFERENCE THAT THE ASSESSEE WAS PERFORMING THESE SERVICES DIRECTLY. A LL THE ACTIVITIES AND SERVICES HAVE BEEN RENDERED BY JEENA WHO HAD RECEIVED THE PAYMENT AS PER THEIR INVOICE. UNDER SUCH A SITUATION, IT CANNOT BE HEL D THAT MARK UP OF 9% SHOULD BE APPLIED ON SUCH COSTS INCURRED BY THE JEENA FOR BEN CH MARKING THE ARMS LENGTH PRICE OF THE ASSESSEE VIS-A-VIS THE TRANSACTIONS W ITH AE. THE NET PROFIT MARGIN REALIZED FROM THE AE IS TO BE COMPUTED ONLY WITH R EFERENCE TO THE COST INCURRED DIRECTLY BY THE ASSESSEE ITSELF AND ITS PROFIT MAR GIN CANNOT BE IMPUTED ON THE COST INCURRED BY THE THIRD PARTY OR UN RELATED PAR TIES SO AS TO COMPUTE THE NET PROFIT MARGIN OF THE ASSESSEE WITH THE TRANSACTIONS WITH THE AE. THE REASON BEING, NO DIRECT COST OF ASSESSEE IS INVOLVED AND A SSESSEE HAS NOT UNDERTAKEN ANY FAR I.E. PERFORMED ANY DIRECT FUNCTIONS, DEPLO YED ANY OR UNDERTAKEN ANY ASSETS RISKS. IN OUR OPINION, THE PAYMENT MADE B Y THE ASSESSEE TO THE THIRD PARTY FOR AND ON BEHALF OF THE AE WHICH HAS BEEN R EIMBURSED BY AE, CANNOT BE INCLUDED IN THE TOTAL COSTS OF THE ASSESSEE FOR T HE PURPOSE OF DETERMINING THE PROFIT MARGIN. ON THIS PROPOSITON, THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF LI AND FUNG INDIA PVT LTD (SUPRA) IS CLEARLY APPLICABLE ON THE ASSESSEES CASE. THE RELEVANT ARGUMENT AND THE DEC ISION OF THE HONBLE DELHI HIGH COURT, ARE AS UNDER): 11. MR. PORUS KAKA, LEARNED SENIOR COUNSEL, WHILE STATING THAT THE TNMM WAS CHOSEN BY LFIL AS THE APPROPRIATE METHOD TO CAL CULATE THE ARM S LENGTH, PROVIDED THE COURT WITH AN INTERPRETATION O F THE PROVISION. HE ARGUED THAT FOR APPLYING TNMM, IT WOULD BE NOTED TH AT THE NET PROFIT I.T.A.NO.435/MUM/2014 12 MARGIN REALIZED FROM THE INTERNATIONAL TRANSACTIONS BY THE APPELLANT IS TO BE COMPUTED ONLY WITH REFERENCE TO THE COST INCURRE D BY LFIL ITSELF. THE PROVISION DOES NOT CONSIDER OR IMPUTE COST INCURRED BY THE THIRD PARTIES OR UNRELATED ENTERPRISES, TO COMPUTE NET PROFIT MARGIN OF THE APPELLANT ENTERPRISE. 12. THE LEARNED COUNSEL STATED THAT THE TPO, IN THE IMPUGNED ORDER, ENHANCED THE COST BASE OF THE APPELLANT ENTERPRISE ARTIFICIALLY BY CONSIDERING THE COST OF MANUFACTURE AND EXPORT OF F INISHED GOODS BY THIRD PARTY VENDORS WHICH IS CLEARLY INCONSISTENT WITH TH E MANNER OF APPLICATION OF TNMM AS PROVIDED IN RULE 10B(1)(E). HE ARGUED TH AT THE TPO S ENHANCEMENT OF LFIL S COST BASE, BY ARTIFICIALLY CONSIDERING THE COST O F MANUFACTURE AND EXPORT OF FINISHED GOODS, CLEARLY A MOUNTS TO IMPUTING NOTIONAL ADJUSTMENT/INCOME IN LFIL S HANDS ON THE BASIS OF A FIXED PERCENTAGE OF THE FOB VALUE OF EXPORT MADE BY UNREL ATED PARTY VENDORS. THUS, THE VALUE ITA 306/2012 PAGE 18 OF EXPORTS BY THIRD PARTY VENDORS OR CUSTOMERS DOES NOT PROVIDE ANY BENCHMARK FOR DETERM INING ARM S LENGTH PRICE. 13. THE LEARNED COUNSEL FOR LFIL SUBMITTED THAT, WH ILE APPLYING THE TNMM METHOD, PAYMENT MADE BY AN ASSESSEE TO THIRD PARTY VENDORS FOR AND ON BEHALF OF THE PRINCIPAL (WHICH WAS REIMBURSED BY TH E AE), CANNOT TO BE INCLUDED IN THE TOTAL COST FOR DETERMINING THE PROF IT MARGIN AND THE MARK UP IS TO BE APPLIED TO THE COST INCURRED BY THE APPELL ANT COMPANY. THE VALUE OF EXPORT BY THIRD PARTY VENDORS TO THIRD PARTY CUS TOMERS DOES NOT PROVIDE ANY SUBSTANTIAL BASIS FOR DETERMINING THE ARM S LENGTH PRICE 14. COUNSEL FURTHER SUBMITTED THAT THE MARK UP UPON THE ENTIRE FOB VALUE OF THE AE WOULD ARTIFICIALLY ENHANCE THE LFIL S COST BASE FOR APPLYING THE OP/TC MARGIN. HE URGED THAT LFIL S COMPENSATION MODEL SHOULD BE BASED ON FUNCTIONS PERFORMED BY IT AND THE OPERATIN G COSTS THEREBY INCURRED AND NOT ON THE COST OF GOODS SOURCED FROM THIRD PARTY VENDORS IN INDIA. THUS, ALLOCATING A MARGIN OF THE VALUE OF GO ODS SOURCED BY THIRD PARTY CUSTOMERS FROM EXPORTERS/VENDORS IN INDIA IS INAPPROPRIATE AND UNJUSTIFIED. XXX XXX XXXX 39. THE TPO S DETERMINATION ENHANCED LFIL S COST BASE FOR APPLYING THE OPERATING PROFIT OVER TOTAL COST MARGIN. LFIL S COMPENSATION MODEL IS BASED ON FUNCTIONS PERFORMED BY IT AND THE OPERATIN G COSTS INCURRED BY IT AND NOT ON THE COST OF GOODS SOURCED FROM THIRD PAR TY VENDORS IN INDIA. ALLOTTING A MARGIN OF THE VALUE OF GOODS SOURCED BY THIRD PARTY CUSTOMERS FROM INDIAN EXPORTERS/VENDORS TO COMPUTE THE APPELL ANT S PROFIT IS UNJUSTIFIED. THIS COURT IS OF OPINION THAT TO APPLY THE TNMM, THE ASSESSEE S NET PROFIT MARGIN REALIZED FROM INTERNATIONAL TRA NSACTIONS HAD TO BE CALCULATED ONLY WITH REFERENCE TO COST INCURR ED BY IT, AND NOT BY ANY OTHER ENTITY, EITHER THIRD PARTY VENDORS OR THE AE. TEXTUALLY, AND WITHIN THE BOUNDS OF THE TEXT MUST THE AO/TPO OPERATE, RULE 10 B(1)(E) DOES NOT ENABLE CONSIDERATION OR IMPUTATION OF COST INCURRED BY THIRD PARTIES OR UNRELATED ENTERPRISES TO COMPUTE THE ASSESSEE S NET PROFIT MARGIN FOR I.T.A.NO.435/MUM/2014 13 APPLICATION OF THE TNMM. RULE 10B(1)(E) RECOGNIZES THAT 'THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM AN INTERNATI ONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN R ELATION TO COSTS ITA 306/2012 PAGE 33 INCURRED OR SALES EFFECTED OR ASSE TS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE ...' (EMPHASIS SUPPLIED) . IT THUS CONTEMPLATES A DETERMINATION OF ALP WITH REFERENCE TO THE RELEVA NT FACTORS (COST, ASSETS, SALES ETC.) OF THE ENTERPRISE IN QUESTION, I.E. THE ASSESSEE, AS OPPOSED TO THE AE OR ANY THIRD PARTY. THE TEXTUAL MANDATE, THU S, IS UNAMBIGUOUSLY CLEAR. 40. THE TPO S REASONING TO ENHANCE THE ASSESSEE S COST BASE BY CONSIDERING THE COST OF MANUFACTURE AND EXPORT OF F INISHED GOODS, I.E., READY-MADE GARMENTS BY THE THIRD PARTY VENDERS (WHI CH COST IS CERTAINLY NOT THE COST INCURRED BY THE ASSESSEE), IS NOWHERE SUPPORTED BY THE TNMM UNDER RULE 10B(1)(E) OF THE RULES. HAVING DETE RMINED THAT (TNMM) TO BE THE MOST APPROPRIATE METHOD, THE ONLY RULES AND NORMS PRESCRIBED IN THAT REGARD COULD HAVE BEEN APPLIED T O DETERMINE WHETHER THE EXERCISE INDICATED BY THE ASSESSEE YIELDED AN A LP. THE APPROACH OF THE TPO AND THE TAX AUTHORITIES IN ESSENCE IMPUTES NOTIONAL ADJUSTMENT/INCOME IN THE ASSESSEE S HANDS ON THE BASIS OF A FIXED PERCENTAGE OF THE FREE ON BOARD VALUE OF EXPORT MAD E BY UNRELATED PARTY VENDERS. XXX XXX XXXX 50. IN LIGHT OF THE ABOVE CIRCUMSTANCES, THIS COURT IS OF THE OPINION THAT THE TPO S ADDITION OF THE COST PLUS 5% MARKUP ON THE FOB VA LUE OF EXPORTS ITA 306/2012 PAGE 40 AMONG THIRD PARTIES TO LFIL S CALCULATION OF ARM S LENGTH PRICE USING THE TNMM IS WITHOUT FOUNDATION A ND LIABLE TO BE DELETED. THE APPEAL IS ALLOWED AND THE ORDER DATED 25/11/11 OF THE ITAT TRIBUNAL, DELHI BRANCH IS LIABLE TO BE AND IS ACCOR DINGLY SET ASIDE. THE QUESTIONS OF LAW FRAMED ARE ANSWERED IN FAVOUR OF T HE ASSESSEE, AND AGAINST THE REVENUE. THE APPEAL IS ALLOWED IN THE A BOVE TERMS. 12. THE RATIO OF THE AFORESAID DECISION WOULD ALSO BE APPLICABLE ON THE FACTS OF THE PRESENT CASE, AS HERE ALSO THE COMPENSATION PAID TO THE ASSESSEE IS BASED ON FUNCTIONS PERFORMED BY IT, I.E. RENDERING OF CUSTOM CLEARANCE SERVICES TO THE AE ON THE OPERATION COSTS INCURRED BY IT AN D NOT ON THE COST OF SERVICES SOURCED FROM THE THIRD PARTY IN INDIA. THUS, TP A DJUSTMENT BY APPLYING 9% MARK-UP ON THE COST OF CUSTOMS CLEARANCE SERVICE RE NDERING THROUGH JEENA CANNOT BE MADE FOR BENCH MARKING THE ALP OF THE AS SESSEE AND ACCORDINGLY SUCH ADJUSTMENTS STANDS DELETED. THUS, GROUND NO. 2 RAISED BY THE ASSESSEE STANDS ALLOWED. I.T.A.NO.435/MUM/2014 14 13. IN GROUND NO.3, THE ASSESSEE HAS CHALLENGED TH E DISALLOWANCE OF BAD DEBTS WRITTEN OFF A BUSINESS LOSS OF RS 28,76,102. THE AO NOTED THAT THE ASSESSEE HAS WRITTEN OFF AN AMOUNT OF RS 28,76,102 /- DURING THE YEAR UNDER CONSIDERATION. HE FURTHER NOTED THAT THESE AMOUN TS WERE NOT SHOWN AS BAD IN THE EARLIER YEARS AS THERE IS NO PROVISION FOR BAD DEBT, IN THE EARLIER YEARS. IN RESPONSE TO THE SHOW CAUSE NOTICE, THE ASSESSEE FIL ED THE DETAILS LIKE INVOICES, PARTIES NAME WHOSE ACCOUNT WERE IRRECOVERABLE DU RING THE YEAR AND AMOUNT WRITTEN OFF IN THE BOOKS OF ACCOUNTS . THE ASSES SEE FURTHER SUBMITTED THAT SUCH AN AMOUNT PERTAINS TO RECEIVABLES FROM THIRD PARTY CUSTOMERS FOR WHOM THE ASSESSEE DOES NOT MAINTAIN SEPARATE AND INDIVIDUAL ACCOUNTS FOR THE REASONS LIKE, ONE TIME TRANSACTION OR THE VALUE OF TRANSACT ION IS BELOW PRESCRIBED LIMIT. THE AO HELD THAT THE ASSESSEE CANNOT WRITE OFF DE BTS AS BAD WITHOUT IT BECOMING BAD. EVEN THOUGH, THE ASSESSEE WAS ACTING AS AN AGENT THEN ALSO, IT WAS REQUIRED TO MAINTAIN DETAIL RECORD OF NAMES A ND ADDRESSES OF THE CLIENTS. THE RELEVANT OBSERVATIONS AND FINDINGS OF THE AO ARE AS UNDER : EXPLANATION FURNISHED BY ASSESSEE IS CONSIDERED CA REFULLY. HOWEVER, THE EXPLANATION FILED BY THE ASSESSEE IS NOT ACCEPTABLE . THE ASSESSEE CANNOT WRITE OFF ANY DEBT AS BAD WITHOUT REASONABLY PROVIN G IT TO BE BAD. THE FACT THAT THE ASSESSEE ACTING AS AN AGENT OF SO CALLED O NE TIME CLIENT WITHOUT TAKING SUFFICIENT ADVANCE TO RECOVER ITS EXPENSE AN D CHARGES IS NOT POSSIBLE. FURTHER, ASSESSEE COMPANY HAS NOT MAINTAI NED RECORD OF NAME AND ADDRESS OF THE PARTY. HOW MONEY CAN BE COLLECTE D FROM SUCH PARTIES IN ABSENCE OF INDIVIDUAL CLIENTS ACCOUNT ? THUS IT IS ALSO NOT POSSIBLE TO VERIFY WHETHER THESE AMOUNTS WERE REPRESENTING RECE IVABLE FROM PARENT COMPANY OR SOME OTHER PARTIES. FURTHER, ASSESSEE HA S FAILED TO BRING ON RECORD EFFORTS TO RECOVER THE SAID OUTSTANDING DEBT S. IN THE REPLY DATED 07/01/2013, IT IS ALSO STATED BY THE ASSESSEE THAT THE AMOUNT OUTSTANDING IS TOWARDS MAKING PAYMENT OF DUT IES AND TAXED IN COURSE OF PROVIDING SERVICES TO THE CLIENTS. THE AS SESSEE RECOVERS SUCH PAYMENTS FROM PARTIES SUBSEQUENTLY. IT IS ALSO NOT OUT OF PLACE TO MENTION THAT THE ASSESSEE RAISES INVOICE ON PARTY TO CLAIM (I) SERVICE CHARGE (I.E. SALES), (II) EXPENSES FOR REIMBURSEMENT (DUTY AND O THER EXPENSES PAID WHILE PROVIDING SERVICES) AND (III) SERVICE TAX LEV IED ON TOTAL AMOUNT OF SERVICES PROVIDED AND EXPENSES CLAIMED. THE REIMBUR SEMENT EXPENSE I.T.A.NO.435/MUM/2014 15 PART IS NOT FORMING PART OF SALE AND THUS NOT CREDI TED TO INCOME OF THE ASSESSEE. THEREFORE, TO THAT EXTENT CONDITION OF SE CTION 36(1)(VII) TO CLAIM BAD DEBTS IS NOT SATISFIED. IT IS NOTICED FROM SAMP LE VOICES FILED BY THE ASSESSEE THAT INVOICE AMOUNT COMPRISES OF SMALL POR TION OF SERVICE CHARGES AND LARGE PROPORTION OF CLAIM OF EXPENSE AN D SERVICE TAX. THE ONUS IS ON THE ASSESSEE TO PROVE THAT THE AMOUN T OF DEBT WAS RECORDED AS INCOME IN ITS BOOKS AND THE SAME HAS BE COME BAD. IN THE PRESENT CASE THE ASSESSEE HAS NOT MAINTAINED RECO RDS OF DEBTORS NAME. FURTHER MOST OF THE AMOUNT NEVER FORMS PART OF SALE /INCOME OF THE ASSESSEE BUSINESS. THE AMOUNT CLAIMED AS BAD DEBTS IS DISALLOWED AND ADDED BACK TO THE INCOME OF THE ASSESSEE. 14. BEFORE US, LD. COUNSEL, SHRI AJIT JAIN, SUBMI TTED THAT THE AMOUNT OUTSTANDING WAS TOWARDS MAKING OF PAYMENT OF DUES A ND TAXES INCURRED ON BEHALF OF CLIENTS FOR PROVIDING SERVICES TO THEM. THE ASSESSEE RECOVERS THE SAME FROM ITS CLIENTS LATER ON. THE SAID AMOUNTS WERE ACTUALLY IRRECOVERABLE IN THIS YEAR AND THEREFORE, IT WAS TREATED AS BAD DEBTS. O THERWISE ALSO, HAS TO BE TREATED AS BUSINESS LOSS OF THE CURRENT YEAR. IN SUPPORT OF HIS CONTENTION HE RELIED UPON THE DECISIONS OF THE HONBLE BOMBAY HIG H COURT IN THE CASES OF HARSHAD J CHOKSI V/S CIT (2012) 349 ITR 250) BOM A ND CIT V/S SHREYAS P MORAKHIA ((2012) 342 ITR 285 (BOM). HE SUBMITTED T HAT WHATEVER DUES COULD BE RECOVERED BY THE ASSESSEE FROM SUCH CLIENTS HAS BEEN OFFERED FOR TAX IN THE SUBSEQUENT YEARS AND IN SUPPORT OF THIS CONTENTION, HE DREW OUR ATTENTIONS TO PAGE 61 OF THE PAPER BOOK, WHEREIN IT HAS BEEN MEN TIONED ABOUT THE INCOME RECOVERED AND OFFERED TO TAX AS INCOME. 15. ON THE OTHER HAND, THE LD. DR STRONGLY RELIED U PON THE ORDER OF AO AND THE DIRECTION GIVEN BY DRP. 16. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND ALS O ON PERUSAL OF RECORD AND FINDING GIVEN IN THE IMPUGNED ORDER, IT IS SEEN TH AT THE AMOUNT OUTSTANDING WHICH HAS BEEN WRITTEN OFF BY THE ASSESSEE, IS MAINLY TO WARDS THE PAYMENT OF DUES I.T.A.NO.435/MUM/2014 16 AND TAXES IN THE COURSE OF PROVIDING SERVICES TO TH E CLIENTS WHICH IS TO BE RECOVERED FROM THE PARTIES SUBSEQUENTLY. ADMITTEDL Y, THIS AMOUNT COULD NOT BE RECOVERED BY THE ASSESSEE FROM THE CLIENTS HENCE WA S CLAIMED AS BAD DEBT. THE DEPARTMENTS CASE IS THAT ONUS IS ON THE ASSESS EE TO PROVE THAT THE AMOUNT OF DEBTS HAS BECOME BAD AND SECONDLY, THE CONDITION S LAID DOWN IN SECTION 36(1)(VII) AND 36(2) HAS NOT BEEN FULFILLED. FR OM THE PERUSAL OF THE DETAILS OF BAD DEBTS AS SUBMITTED BY THE ASSESSEE, FROM PAGES 19 TO 33 OF PAPER BOOK, IT IS SEEN THAT THE ASSESSEE HAS RAISED INVOICES FOR THE PERIOD FROM JULY 2007 TO MARCH 2009 AGAINST THE VARIOUS PARTIES MENTIONING T HE AMOUNT FOR CUSTOM CLEARANCE SERVICES. THE ASSESSEE AS A PART OF SER VICE OFFERED TO ITS CLIENTS WAS REQUIRED TO MAKE CERTAIN PAYMENTS ON BEHALF OF THES E PARTIES AT THE TIME OF CUSTOM CLEARANCE PACKAGES I.E. CUSTOM DUTIES AND TA X. THESE AMOUNTS ARE SUBSEQUENTLY RECOVERED BY THE ASSESSEE FROM THE CU STOMERS AS SERVICE FEE FOR THE SERVICES UNDERTAKEN. ONCE THE DUES WERE NOT R ECOVERED BY THE ASSESSEE, THEN IN THE BOOKS OF ACCOUNT IT HAS BEEN WRITTEN O FF AS BAD DEBTS. THE AMOUNT WHICH IS APPEARING ARE ALSO SUPPORTED BY VOUCHERS WHICH ARE RANGING FROM FEW HUNDREDS TO FEW THOUSANDS FOR MORE THAN 749 CUSTOM ERS. ONCE, THE ASSESSEE WAS UNABLE TO RECOVER THE AMOUNT, THEN IT HAS TO B E ALLOWED AS BAD DEBTS. EVEN IF SUCH AMOUNT IS NOT ALLOWED AS BAD DEBTS TH EN THE SAME HAS TO BE ALLOWED AS BUSINESS LOSS AS HELD BY THE HONBLE BOM BAY HIGH COURT IN THE CASE OF HARSHAD J CHOKSI (SUPRA). FURTHER, IN CIT V/S SHREYAS S MORAKHIA (SUPRA), IN THE CONTEXT OF SHARE BROKER, IT WAS HELD THAT UNREALIZED VALUE OF SHARES FROM THE CLIENTS CAN BE CLAIMED AS BAD DEBTS U/S 36(1)( VII) OF THE ACT, AS THE BROKERAGE FROM THE CLIENTS IS TAKEN TO THE PROFIT AND LOSS ACCOUNT, THEREFORE, THE SAME IS TO BE ALLOWED AS BAD DEBTS. HERE IN THIS C ASE ALSO, THE ASSESSEE IS EARNING SERVICES FEES FOR RENDERING SUCH SERVICES A ND IF ANY SUCH AMOUNT PAID BY I.T.A.NO.435/MUM/2014 17 THE ASSESSEE ON BEHALF OF THE PARTIES REMAINED UNRE COVERABLE, THEN THE SAME CAN BE ALLOWED AS BAD DEBTS. THUS, FROM BOTH TH E ANGLES, WE DO NOT FIND ANY REASON TO CONFIRM THE DISALLOWANCE OF RS 28,76,102 , AND ACCORDINGLY, THE SAME IS DELETED. 17. REGARDING GROUND NO.1, THE LD.AR OF THE ASSESSE E SUBMITTED THAT IT IS PURELY ACADEMIC IN NATURE, THEREFORE, THE SAME IS N OT ADJUDICATED UPON, HENCE IT IS TREATED AS DISMISSED. . 18. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS P ARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 10TH DEC,2 014 , /0$# 1 2 3 10TH DECL, 2014 0 , 4- SD SD ( . . !'# /N.K.BILLAIYA) ( /AMIT SHUKLA) $ % / ACCOUNTANT MEMBER & ' / JUDICIAL MEMBER - MUMBAI : ON THIS 10TH DEC, 2014 . . ./ SRL , SR. PS ( )&*+, -,.* / COPY OF THE ORDER FORWARDED TO : 1. %( / THE APPELLANT 2. )* %( / THE RESPONDENT. 3. ( ) / THE CIT(A)- 4. / CIT 5. 56 4 )7! , . 7!# , - / DR, ITAT, MUMBAI 6. 4 8' 9 - / GUARD FILE. / BY ORDER, TRUE COPY : & (ASSTT. REGISTRAR) . 7!# , - /ITAT, MUMBAI