2017 (2) TMI 1410 - AT - Income Tax

TP adjustment - selection of comparable - functionally comparable -inclusion of R systems international Ltd alone - Different Financial year - HELD THAT - ssessee has made out a case supra we remit this matter to the TPO for re-examination and readjudication. TP adjustment - selection of comparable - functinal dissimilarity - ICRA Online Ltd with unadjusted margin of 43.39% has to be rejected for the reason that it is not functionally comparable and fails export earning filter. - HELD THAT - assessee has made out a case and hence direct the TPO to exclude the above comparables. Provision for bad and doubtful debts as non-operating in nature - HELD THAT - The provision for doubtful debts fit the description of operating items associated with the rendering of services and should be considered as part of the operating costs and relied in case of Techbooks International Pvt. Ltd. Vs. DCIT 2015 (7) TMI 473 - ITAT DELHI . Thus Provision for bad and doubtful debts should be treated as operating expenses as they are closely linked with the business operations and accordingly direct the TPO to do so. Computation of working capital adjustment - TPO is of opinion that working capital adjustment should be restricted to 0.85% - HELD THAT - TPO has not given the basis of arriving at the average cost of capital of the comparable companies. As assessee relied on the decision of this Tribunal in Moong Controls India P Ltd 2015 (11) TMI 1719 - ITAT BANGALORE wherein as directed the TPO to allow actual adjustment towards the differences in the of working capital position between the assesseee and the entrepreneurial companies selected as comparable . We direct the TPO to follow this decision. Non providing appropriate risk adjustment - assessee is a captive contract IT enabled service provider to its AEs. - HELD THAT - In the case of Chryscapital Investment Advisors (India) Pvt. Ltd. Vs DCIT 2015 (4) TMI 949 - DELHI HIGH COURT wherein held that appropriate adjustments should be carried out in situations where there are differences between the tested parties and comparables and in case such differences perceptible in the comparables cannot be eliminated on account of adjustments or otherwise then such comparables have to be rejected. We heard the rival submissions and find that the assessee has made out a case supra and hence direct the TPO to make appropriate risk adjustment. Depreciation adjustment on account of difference in the rates of depreciation of the assessee vis- -vis comparable companies - HELD THAT - The arithmetic mean OP/ TC margin (post factoring the impact of depreciation) of the comparable companies considered by the TPO is 22.80% which falls within the / -5% range of the OP / TC margin of 17.63% (as computed by the TPO) earned by the assessee during the FY 2009-10. Accordingly the prices of international transactions of the assessee in relation to provision of IT enabled services comply with the Arm s Length standard prescribed under the Indian Regulations.We remit this matter to the TPO for re-examination and re-adjudication

Summary

Issues Involved:
1. Inclusion of R Systems International Ltd as a comparable company.
2. Exclusion of certain comparable companies selected by the TPO.
3. Treatment of provision for bad and doubtful debts.
4. Computation of working capital adjustment.
5. Provision of appropriate risk adjustment.
6. Provision of appropriate depreciation adjustment.

Detailed Analysis:

1. Inclusion of R Systems International Ltd as a Comparable Company:
The Appellant argued for the inclusion of R Systems International Ltd, which was excluded by the DRP due to a different financial year ending. The Appellant cited previous years' acceptance by the TPO and the availability of relevant financial data from audited quarterly reports. The Tribunal referenced judgments in Mercer Consulting (India) Pvt. Ltd. and Ameriprise India Private Limited vs. ACIT, which supported inclusion if financial data for the relevant year is available. The Tribunal remitted the matter to the TPO for re-examination and readjudication.

2. Exclusion of Certain Comparable Companies Selected by the TPO:
The Appellant contested the inclusion of Accentia Technologies Ltd, Fortune Infotech Ltd, and ICRA Online Ltd, arguing they were not functionally comparable due to reasons like product development, presence of intellectual property rights, extraordinary events, and failure to meet export earning filters. The Tribunal agreed with the Appellant’s submissions and directed the TPO to exclude these comparables.

3. Treatment of Provision for Bad and Doubtful Debts:
The Appellant argued that provisions for bad and doubtful debts should be considered operating expenses, citing the case of Techbooks International Pvt. Ltd. vs. DCIT. The Tribunal agreed, stating these provisions are closely linked with business operations and directed the TPO to treat them as operating expenses.

4. Computation of Working Capital Adjustment:
The Appellant contended that the TPO did not provide a basis for restricting the working capital adjustment to 0.85%. They cited the Tribunal’s decision in Moong Controls India P Ltd, which directed the TPO to allow actual adjustments for differences in working capital positions. The Tribunal directed the TPO to follow this precedent and allow appropriate adjustments.

5. Provision of Appropriate Risk Adjustment:
The Appellant, being a captive service provider, argued for risk adjustments, as significant business risks were borne by the AE. They relied on judgments from Sony India (P) Limited, E-Gain Communication Pvt. Ltd., and Motorola Solutions India Private Limited vs. ACIT, which mandated comparability adjustments. The Tribunal agreed and directed the TPO to make appropriate risk adjustments.

6. Provision of Appropriate Depreciation Adjustment:
The Appellant sought adjustments due to higher depreciation rates compared to those prescribed under the Companies Act, 1956. They cited judgments from ExlService.com India Private Limited vs. ACIT and ACI Worldwide Solutions Private Ltd, which supported adjustments for differential depreciation rates. The Tribunal found merit in the submissions and remitted the matter to the TPO for re-examination and re-adjudication.

Conclusion:
The appeal of the assessee was treated as allowed, with directions for the TPO to re-examine and re-adjudicate the matters based on the Tribunal’s findings and applicable precedents. The order was pronounced in the open court on 6th February 2017.