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Once a particular expenditure itself is disallowed, there can be no question of including it in the Operating expenses for calculating the profit margin in the process of determination of the ALP.

Shanti Prime Publication Pvt. Ltd.

Sec. 92C & 92CA of Income Tax Act, 1961–Transfer Pricing – Assessee filed its return declaring total income at Rs. 1,99,54,082/–. Certain international transactions were reported in Form No.3CEB. The AO made a reference to the TPO for determining the ALP of the reported 'Specified Domestic Transaction' amounting to Rs. 7,07,45,549/– after obtaining due approval from the Pr. CIT. The TPO recommended transfer pricing adjustment of Rs. 1,11,28,742/– to the value of the 'International transaction'. A draft order was passed accordingly. The DRP gave certain directions which had the effect of reducing the amount of transfer pricing adjustment from Rs. 1.11 crore and odd to Rs. 79,81,424/– in the final assessment order. Aggrieved thereby, the assessee is in appeal before the Tribunal. ITAT held that:- Provision for doubtful debts cannot be treated as a non–operating expense. Therefore, directed to include the amount of Provision for doubtful debts in the expense side of this company for calculating the profit margin. Similar is the position regarding Exilant Technologies. Provision for bad and doubtful debts of this company stands at Rs. 81,91,798/- which can be found in the detail of Other expenses. Thus, directed to include Reserve for doubtful debts as an item of operating expenses in calculating the operating profit margin of this company. Appeal partly allowed —EXTENTIA INFORMATION TECHNOLOGY PVT. LTD. Vs. DEPUTY CIT  [2020] 79 ITR (TRIB) 364 (ITAT–PUNE)