2022 (6) TMI 1350 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Companies whose turnover in the current year is more than Rs.200 crores needs to be excluded for the purpose of comparable companies. R.S.Software Ltd. should be excluded from the list of comparables. Rectification of margin of Harbinger Systems Pvt. Ltd. - The weighted average margin of the company was rightly computed by the TPO 14.74% however in the final list of comparables of the TPO order the TPO adopted the margin at 15.06% which is an apparent mistake. We therefore direct the TPO to consider this afresh while recomputing the ALP in the SWD services segment in the light of the directions given in this order. Disallowance of provision for Bad Debts - HELD THAT - We notice that the party wise details of the bad debts written off as furnished before the DRP- Further the sum was created as a provision in the financial year relevant to assessment year 2014-15 was offered to tax in the said year which fact is substantiated by the relevant extracts of the financial statements and the statement of computation of income for the assessment year 2014-15 that can be seen - Based on these facts we are of the considered view that that the disallowance which was already disallowed in the computation of income of the assessee should be deleted since otherwise the same would result in double disallowance.

Summary

Issues Involved:
1. Transfer Pricing (TP) adjustment of Rs. 1,86,14,568/- for the provision of software development services (SWD services) to the Assessee's Associated Enterprises (AE).
2. Disallowance of Rs. 19,22,610/- as provision for bad and doubtful debts.

Detailed Analysis:

1. Transfer Pricing Adjustment:

Background:
The assessee, a subsidiary of Wibmo Inc., USA, engaged in rendering software development and related support services to its AE, filed its return of income for the assessment year 2016-17 declaring a total income of Rs.2,17,59,360. The Assessing Officer (AO) referred the case to the Transfer Pricing Officer (TPO) who determined a TP adjustment of Rs. 1,86,14,568/-.

Functional Analysis (FAR):
The TPO's FAR analysis characterized the taxpayer as a captive service provider assuming minimal risks. The TPO used the transactional net margin method (TNMM) with operating profit/operating cost as the profit level indicator (PLI).

Comparables and Filters:
The assessee chose 30 comparables, but the TPO accepted only two and selected additional comparables using fresh filters. The TPO's final set included companies with high turnovers, leading to a TP adjustment.

Assessee's Contentions:
The assessee contended that the TPO erred by not applying an upper turnover filter, which is relevant as differences in scale impact profitability. The assessee relied on the decision in Autodesk India (P) Ltd. V. DCIT.

Tribunal's Observations:
The Tribunal noted that the TPO excluded companies with less than Rs.1 crore turnover but did not apply the same logic to high turnover companies. The Tribunal referenced the decision in Barracuda Networks India Private Limited v. DCIT, which supported the exclusion of companies with turnovers exceeding Rs.200 crores.

Decision:
The Tribunal held that companies with turnovers exceeding Rs.200 crores should be excluded from the comparables. The Tribunal also addressed the inclusion of R S Software (India) Ltd., noting its wide fluctuation in profit margins and applying Rule 10CA of the Income-tax Rules to exclude its margins for years when its turnover was above Rs.200 crores.

Rectification of Margins:
The Tribunal directed the TPO to correct the margin computation for Harbinger Systems Pvt. Ltd., which had an apparent mistake in the final list of comparables.

2. Disallowance of Provision for Bad and Doubtful Debts:

Background:
The assessee debited Rs. 19,22,610/- under 'provision for bad debts' in the profit and loss account. The AO disallowed the entire amount, and the DRP upheld the disallowance, stating the amount was not written off and not established as income in previous years.

Assessee's Contentions:
The assessee argued that Rs. 16,25,897/- represented actual write-offs, previously disallowed in the assessment year 2014-15, and only Rs. 2,96,713/- was a provision. The assessee provided party-wise details and computation of income for the assessment year 2014-15.

Tribunal's Observations:
The Tribunal reviewed the party-wise details and confirmed that Rs. 16,25,897/- was already disallowed in the computation of income for the assessment year 2014-15.

Decision:
The Tribunal ordered the deletion of the disallowance to the extent of Rs. 16,25,897/- to avoid double disallowance, partially allowing the assessee's appeal.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the exclusion of high turnover comparables and correcting the margin computation for certain companies. The disallowance of the provision for bad debts was partially deleted to prevent double disallowance.