2019 (1) TMI 1548 - AT - Income Tax

TP adjustment - selection of comparable - HELD THAT - Assessee has been treated as an ITeS back office service provider thus companies functionally dissimilar with that of assessee need to be deselected from final list. Comparability of Capgemini Business services (India) Limited and Hartron Communications Limited rejected Provisions for bad and doubtful debts and bad debts written off as part of operating expenses - HELD THAT - We find that the DRP has also followed certain decisions of the Tribunal to hold that the provision for bad and doubtful debts do not form part of operating expenses. We agree with the findings of the Coordinate Bench in KENEXA TECHNOLOGIES (P.) LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE -2 (1) , HYDERABAD 2014 (11) TMI 587 - ITAT HYDERABAD that the provision of bad and doubtful debts is part of the operating expenses. Therefore, respectfully following the decision of the Coordinate Bench, we direct the AO/TPO to consider the provision for bad and doubtful debts both in the assessee as well as comparable cases as part of operating expenses. This ground of appeal is accordingly allowed. Working capital adjustment - denial on the ground that there is a negative working capital adjustment and therefore, no adjustment shall be made - HELD THAT - In the case of M/s Intoto Software (India) P Ltd vs. ITO, Bengaluru 2013 (10) TMI 599 - ITAT HYDERABAD the decision of the Hyderabad Bench of the Tribunal in the case of Adaptec (India) P Ltd vs. ACIT 2015 (6) TMI 288 - ITAT HYDERABAD was considered to direct the AO not to make any negative working capital adjustment. Respectfully following the same, we direct the AO not to make any negative working capital adjustment. Correct numbers with respect to average receivables/payables of the comparables selected in the TP order - we direct the TPO to adopt the correct figure of average receivables/payables for computing the working capital adjustment. Assessee s grounds are accordingly treated as allowed for statistical purposes.

Summary

Issues Involved:
1. Validity of the assessment order.
2. Transfer Pricing Adjustments.
3. Selection and rejection of comparable companies.
4. Use of filters and data for comparability analysis.
5. Working capital and risk adjustments.
6. Computation of interest under section 234B.

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee challenged the final assessment order dated 27 October 2017, passed under sections 143(3), 144C(5), and 144C(13) of the IT Act, as being "bad in law and void ab-initio." However, this ground was not pressed during the hearing.

2. Transfer Pricing Adjustments:
The assessee contested the transfer pricing adjustment of ?1,97,72,254 on account of providing Information Technology enabled Services (ITeS) to its associated enterprises (AEs). The TPO rejected the transfer pricing documentation maintained by the assessee and conducted a fresh economic analysis, leading to an adjustment.

3. Selection and Rejection of Comparable Companies:
- Inclusion of Capgemini Business Services (India) Limited and Hartron Communications Limited:
The assessee argued that these companies were functionally dissimilar. The Tribunal found that Capgemini Business Services was involved in diversified operations and lacked segmental information for ITeS services. Hartron Communications provided multiple services, and its auditor had qualified its report on non-compliance with Accounting Standard-15. The Tribunal directed the AO to exclude these companies from the comparables list.

- Exclusion of Ace BPO Services Private Limited, Informed Technologies India Limited, Jindal Intellicom Limited, and Crystal Voxx Ltd:
The Tribunal directed the AO/TPO to verify the comparability of these companies afresh. Ace BPO Services and Informed Technologies were found to be engaged in ITeS services, and their comparability needed verification. Jindal Intellicom's inclusion was to be reconsidered based on its acceptance in previous assessment years. Crystal Voxx Ltd's comparability was to be verified due to its engagement in BPO services.

4. Use of Filters and Data for Comparability Analysis:
The assessee did not press the grounds related to the use of different financial year-end filters and the rejection of multiple-year data.

5. Working Capital and Risk Adjustments:
- Working Capital Adjustment:
The Tribunal found that the AO and DRP erred in not allowing working capital adjustment due to a negative working capital. Citing previous Tribunal decisions, it was held that negative working capital adjustment should not be made when the assessee does not bear working capital risks. The AO was directed to adopt the correct figures for average receivables/payables.

- Risk Adjustment:
The assessee did not press the ground related to risk adjustment.

6. Computation of Interest under Section 234B:
The ground related to the computation of interest under section 234B was consequential and did not require separate adjudication.

Conclusion:
The Tribunal partly allowed the assessee's appeal, directing the AO to exclude certain companies from the comparables list, verify the comparability of other companies afresh, and not make negative working capital adjustments. The provision for bad and doubtful debts was to be considered as part of operating expenses for margin computation. The appeal was treated as allowed for statistical purposes.