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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
December, 11th 2014
                                                                   I.T.A.No.435/Mum/2014
                   
        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      /       Dy. Commissioner of Income Tax
     and Supply Chain Services                 Range 8(1),
                                       Vs.
     India Private Limited (Merged             2nd floor, Room No.204
     Federal Express India Pvt.Ltd.)           Aayakar Bhavan,
     C/o BMR and Associates LLP,               M.K.Road,
     36-B. Dr.B.R.Shirodkar Marg,              Mumbai-400020
     Parel (E),
     Mumbai-400012
       ./ ./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
               /Date of Pronouncement : 10.12.2014

                                   / O R D E R

Per AMIT SHUKLA(JM)

         This appeal has been preferred       by the assessee against the final

assessment order dated 30.12.2013, passed             under section 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 raised 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 assessment 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 respect of mark up to
be earned by the Appellant on payments made to third party service
providers towards custom clearance of high value packages;

2.2 erroneously computing the mark-up to be earned by the Appellant on
payments made to third party service providers as per the agreement
entered into between the Appellant and its AE without appreciating the
intent of agreement and the implicit arrangement between the parties:

2.3 in erroneously computing a mark-up to be earned by the Appellant on
payments made to third party service providers without 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 without considering the
arm's length margin of comparable companies having similar pass through
costs;

2.5 In failing to appreciate that even if the payments made to third party
service providers were to be considered as part of the operating revenue
and operating expense earned / incurred by the Appellant towards
coordination of custom clearance services for high value packages, the
fee received by the Appellant from its Associated Enterprise ('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 Hon'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 Rs 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 and allowed as a
deduction.

4.    The ld. AO erred in not granting credit for taxes deducted at
source amounting to Rs.27,55,636/- and consequential 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 submitted that ground no.4

raised by the assessee is not pressed. Accordingly, the same is treated as

dismissed as not pressed.


4.    The main issue involved in this appeal has been raised in ground No.2,

which is Transfer pricing adjustment of Rs 1,55,35,432/-. 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 Transportation 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 international priority packages and freight.

The assessee company was mostly engaged in providing custom clearance

service to FEC, which is its Associate Enterprise (AE) relating to high value

packages and low value packages. The assessee, however, had license to

provide only Low value services and not high value 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 services 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 company by its own and with

the coordination of M/s Jeena provided following services to its AE in India:


i)    Provision of custom clearance services for low value packages.:

      These services were essentially in the nature of preparing and filing the
      prescribed documentation and payments of duties and taxes to the
      customs authorities. The assessee in the agreement 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 by 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 requisite license. The
           Assessee was required to facilitate and coordinate with for the clearance
           of high value packages for AE, to ensure that the services were
           undertaken in accordance with FEC's global standards. For coordinating
           such services the assessee had charged cost plus mark-up of 9 percent.

iii)       Custom clearance fees:            .

           For the low value and high value transactions, the assessee was
           entrusted with the task of paying appropriate duties 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 shipment, 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     Nature of international transaction        FY 2008-09        Method used    Name of the
       No                                                      Rs                            AE
       1     Provision of custom clearance                  5,85,42,664      TNMM        Federal
             services for low value packages                                             Express
                                                                                         Corporation
                                                                                                 -
                                                                                         Branch Office
                                                                                         ('FEC BO
       2     Coordination of custom                of         37,69,464      TNMM
             clearance services for high value
             packages.

       3                                                     289,83,056      CUP
             Custom clearance fee
       4     Co-ordination of back-up                         89,81,719      TNMM        Federal
             operation                                                                   Express
                                                                                         European
                                                                                         Services Inc
                                                                                         (FCC)
                                                                          I.T.A.No.435/Mum/2014
                                                5


The segmental accounts of the assessee, revealed the following details of
revenue, cost and mark-up :

                                                                         All Amounts in Rs.
     Particulars     custom          customs        custom          back office As per P&L
                     clearance for   clearance      clearance       operation     account
                     low     value   for     high   advancement     (WNS)
                     (Mark-up)       value (Jena)   fee
                     14%
     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                                      3,83,97,399                   3,83,97,399
     fees
     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, the 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 selected Profit Level Indicator

(PLI) based on cost in establishing arm length profitability, whereas while

applying markup on cost, the assessee has excluded the cost in respect of

payment made to Jeena and the custom duties. In response to the show cause

notice as to why these payments have not been routed 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 comprises of custom duty

and stamp duty; and two, service fee which comprises of warehousing charges,

airlines charges and agency charges.                The total     payments on     account of

payment of custom duty was Rs.14,62,68,929/- and the closing amount available
                                                                            I.T.A.No.435/Mum/2014
                                               6


with Jeena as on 31.3.2009 was Rs.12,62,354/- Thus , the payment of service

fee was also based on invoices raised by Jeena. This advance given to Jeena

was also routed through balance sheet of the assessee 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 cost 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 also taken note of the

agreement arrived between the assessee and Jeena entered on 1.4.2006, which

was further amended on 11.9.2008. The relevant portion of the said agreement

has also been incorporated by the TPO at pages 9 and 10 of his order. From

the terms of the agreement, the TPO deduced that the assessee had direct

control and monitoring of day to day activities of Jeena and assessee could not

give any proper reasons for excluding these payments while considering the

cost base for applying the markup. further the assessee company has paid the

amount of        Rs.17,26,15,911/- to Jeena which has been 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          customs          back office     custom         As per P&L
                   clearance for   clearance for    operation       clearance      account
                   low     value   high   value     (WNS)           advancement
                   (Mark-up)       (Jena)                           fee
                   14%
   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 custom 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 assessee on the entire cost

of high value services as the payment to Jeena cannot be a pass through cost

as stated by the assessee.


5.1      He accordingly made the transfer pricing adjustment 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)                     1,58,46,672
      price charged by the assessee                                         3,11,240
      adjustment                                                         1,55,35,432


6.       Such an adjustment has been confirmed by the DRP in their direction to

the AO,, which has been dealt in detail in paragraphs 2.3.1 and 2.3.2 of the

DRP's 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 Hon'ble 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 Hon'ble High Court 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 cannot be upheld.                       He

submitted that FEC was conducting its business of high 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 applying mark-up 9% on the

actual     cost of Rs.34,58,222/-.     Under these circumstances, The AE has

reimbursed the payment made by assessee to Jeena, amounting 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 rendered by Jeena for which

payment was made by the assessee which was fully reimbursed by the AE.

Thus, there was no element of any markup on the cost. 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 payment made to Jeena, were

routed through balance sheet of the assessee. Mr. Ajit Jain submitted that on

similar facts and circumstances, the Hon'ble Delhi High Court has held that

such on application of markup for the payment made 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 for 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 into an agreement with Jeena
                                                              I.T.A.No.435/Mum/2014
                                       9


for rendering high value services, the assessee was 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.       Thus, 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 placed on record.              The

assessee is mainly rendering custom clearance services 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 cost 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 dispute.       Admittedly, for the

provisions of custom clearance services for high value packages , the assessee

did not had the requisite license from the competent 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 assessee came into existence,

the   AE decided that the assessee will co-ordinate with Jeena for customer

clearance services for high value packages.   Under this segment of services the

assessee use to advance money to Jeena for the purpose 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.31,88,84,840/- was made to

Jeena, which consisted of custom duty paid by Jeena and also service fee
                                                             I.T.A.No.435/Mum/2014
                                       10


charged by Jeena. This entire amount was routed through balance sheet, as

the assessee was not directly rendering any services 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 involved. For co-ordinating the

services with Jeena, the assessee has separately earned a fee of Rs.3,11,240/-

from its AE which was computed by applying the markup 9% on the actual cost

of Rs.34,58,224/- incurred by the assessee. This amount was routed through

profit and loss account. The department's 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 been given on the premise that

the assessee company was monitoring the entire activities 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 examine from the angle, whether

for co-ordinating high value services, the assessee 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 party who had the requisite

license. The assessee's role was confined to making 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 merely pass through such cost.

In other words, assessee     has merely done co-ordinating services, rather than

providing full fledged services.     The department's allegations     that it was

monitoring Jeena's activity does not per se lead to any inference that          the

assessee was performing these services directly. All 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 held that mark up of 9% should be

applied on such costs incurred by the Jeena for bench marking the arms length

price of the assessee vis-a-vis the transactions with AE. The net profit margin

realized from the AE is to be computed only with reference to the cost incurred

directly by the assessee itself and its profit margin cannot be imputed on the

cost incurred by the third party or un related parties 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 assessee has not undertaken

any FAR i.e. performed any direct functions, deployed any or undertaken any

assets risks. In our opinion, the payment made by the assessee to the third

party for and on behalf of the AE which has been reimbursed by AE, cannot be

included in the total costs of the assessee for the purpose of determining the

profit margin.   On this propositon, the decision of the Hon'ble Delhi High Court

in the case of `Li and Fung India Pvt Ltd' (supra) is clearly applicable on the

assessee's case. The relevant argument and the decision of the Hon'ble 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 calculate the arms
       length, provided the court with an interpretation of the provision. He
       argued that for applying TNMM, it would be noted that 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 incurred 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 finished goods by third
party vendors which is clearly inconsistent with the manner of application
of TNMM as provided in Rule 10B(1)(e). He argued that the TPOs
enhancement of LFILs cost base, by artificially considering the cost of
manufacture and export of finished goods, clearly amounts to imputing
notional adjustment/income in LFILs hands on the basis of a fixed
percentage of the FOB value of export made by unrelated party vendors.
Thus, the value ITA 306/2012 Page 18 of exports by third party vendors or
customers does not provide any benchmark for determining arms length
price.

13. The learned counsel for LFIL submitted that, while applying the TNMM
method, payment made by an assessee to third party vendors for and on
behalf of the principal (which was reimbursed by the AE), cannot to be
included in the total cost for determining the profit margin and the mark up
is to be applied to the cost incurred by the appellant company. The value
of export by third party vendors to third party customers does not provide
any substantial basis for determining the arms length price

14. Counsel further submitted that the mark up upon the entire FOB value
of the AE would artificially enhance the LFILs cost base for applying the
OP/TC margin. He urged that LFILs compensation model should be
based on functions performed by it and the operating 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 goods sourced by third
party customers from exporters/vendors in India is inappropriate and
unjustified.

xxx     xxx      xxxx

39. The TPOs determination enhanced LFILs cost base for applying the
operating profit over total cost margin. LFILs compensation model is
based on functions performed by it and the operating costs incurred by it
and not on the cost of goods sourced from third party vendors in India.
Allotting a margin of the value of goods sourced by third party customers
from Indian exporters/vendors to compute the appellants profit is
unjustified. This Court is of opinion that to apply the TNMM, the
assessees net profit margin realized from international transactions had
to be calculated only with reference to cost incurred 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 10B(1)(e) does not
enable consideration or imputation of cost incurred by third parties or
unrelated enterprises to compute the assessees 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 international transaction entered
      into with an associated enterprise is computed in relation to costs ITA
      306/2012 Page 33 incurred or sales effected or assets employed or to be
      employed by the enterprise ..." (emphasis supplied). It thus contemplates
      a determination of ALP with reference to the relevant 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, thus, is unambiguously
      clear.

      40. The TPOs reasoning to enhance the assessees cost base by
      considering the cost of manufacture and export of finished goods, i.e.,
      ready-made garments by the third party venders (which 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 determined that
      (TNMM) to be the most appropriate method, the only rules and norms
      prescribed in that regard could have been applied to determine whether
      the exercise indicated by the assessee yielded an ALP. The approach of
      the TPO and the tax authorities in essence imputes notional
      adjustment/income in the assessees hands on the basis of a fixed
      percentage of the free on board value of export made by unrelated party
      venders.

      xxx   xxx   xxxx

      50. In light of the above circumstances, this Court is of the opinion that the
      TPOs addition of the cost plus 5% markup on the FOB value of exports
      ITA 306/2012 Page 40 among third parties to LFILs calculation of arms
      length price using the TNMM is without foundation and 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 accordingly set aside. The
      questions of law framed are answered in favour of the assessee, and
      against the revenue. The appeal is allowed in the above 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 and not on the cost of services

sourced from the third party in India. Thus, TP adjustment by applying 9%

mark-up on the cost of customs clearance service rendering through Jeena

cannot be made for bench marking the ALP of the assessee 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 the 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 amounts 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 filed the details like invoices,

parties name whose account were irrecoverable during the year and amount

written off in the books of accounts .     The assessee 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 transaction is below prescribed limit.

The AO held that the assessee            cannot   write off debts 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 and addresses of the clients.

The relevant observations and findings of the AO are as under :


       "Explanation furnished by assessee is considered carefully. However, the
       explanation filed by the assessee is not acceptable. The assessee cannot
       write off any debt as bad without reasonably proving it to be bad. The fact
       that the assessee acting as an agent of so called one time client without
       taking sufficient advance to recover its expense and charges is not
       possible. Further, assessee company has not maintained record of name
       and address of the party. How money can be collected from such parties
       in absence of individual clients account ? Thus it is also not possible to
       verify whether these amounts were representing receivable from parent
       company or some other parties. Further, assessee has failed to bring on
       record efforts to recover the said outstanding debts.

       In the reply dated 07/01/2013, it is also stated by the assessee that the
       amount outstanding is towards making payment of duties and taxed in
       course of providing services to the clients. The assessee 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 other expenses paid
       while providing services) and (iii) Service tax levied on total amount of
       services provided and expenses claimed. The reimbursement expense
                                                               I.T.A.No.435/Mum/2014
                                       15


      part is not forming part of sale and thus not credited to income of the
      assessee. Therefore, to that extent condition of section 36(1)(vii) to claim
      bad debts is not satisfied. It is noticed from sample voices filed by the
      assessee that invoice amount comprises of small portion of service
      charges and large proportion of claim of Expense and Service Tax.

      The onus is on the assessee to prove that the amount of debt was
      recorded as income in its books and the same has become bad. In the
      present case the assessee has not maintained records of debtor's 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, submitted that the amount

outstanding was towards making of payment of dues and 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.     Otherwise also, has to be

treated as business loss of the current year.    In support of his contention he

relied upon the decisions of the Hon'ble Bombay High Court in the cases of

Harshad J Choksi V/s CIT (2012) 349 ITR 250) Bom and CIT V/s Shreyas P

Morakhia ((2012) 342 ITR 285 (Bom). He submitted that 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 mentioned about the income

recovered and offered to tax as income.


15.   On the other hand, the ld. DR strongly relied upon the order of      AO and

the direction given by DRP.


16.   After considering the rival submissions and also on perusal of record and

finding given in the impugned order, it is seen that the amount outstanding which

has been written off by the assessee, is mainly towards the payment of dues
                                                               I.T.A.No.435/Mum/2014
                                       16


and taxes in the course of providing services to the clients which is to be

recovered from the parties subsequently. Admittedly, this amount could not be

recovered by the assessee from the clients hence was claimed as bad debt.

The department's case is that onus is on the assessee to prove that the amount

of debts has become bad and secondly, the conditions laid down in section

36(1)(vii) and 36(2) has not been fulfilled.   From 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 the amount for custom

clearance services. The assessee as a part of service offered to its clients was

required to make certain payments on behalf of these parties at the time of

custom clearance packages i.e. custom duties and tax.        These amounts are

subsequently recovered by the assessee from the customers as service fee for

the services undertaken. Once the dues were not recovered by the assessee,

then in the books of account it has been written off 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 customers. Once, the assessee

was unable to recover the amount, then it has to be allowed as bad debts.

Even if such amount is not allowed as bad debts then the same has to be

allowed as business loss as held by the Hon'ble Bombay 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 case also, the assessee is

earning services fees for rendering such services and if any such amount paid by
                                                                  I.T.A.No.435/Mum/2014
                                        17


the assessee on behalf of the parties remained unrecoverable, then the same

can be allowed as bad debts.      Thus, from both the 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 assessee submitted that it is

purely academic in nature, therefore, the same is not adjudicated upon, hence it

is treated as dismissed. .


18.    In the result, the appeal of the assessee is partly allowed.


       Order pronounced in the open court on 10th      Dec,2014

                10th                                   Decl, 2014   

      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.        ,     ,  / DR,
      ITAT, Mumbai
6.      / Guard file.
                                                           / BY ORDER,

true copy
                                                    (Asstt. Registrar)
                                         ,  /ITAT, Mumbai

 
 
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