2023 (3) TMI 1440 - AT - Income Tax

TP Adjustment - Provision for Bad and Doubtful Debts as operating expenditure - HELD THAT - This Tribunal in the case of ACI Worldwide Solutions Pvt. Ltd 2019 (9) TMI 1595 - ITAT BANGALORE as held that provision for bad and doubtful debts should be treated as operating expense while computing the PLI OP/OC of the comparable companies which ultimately remains for comparison. In view of the above order of the Tribunal we direct the AO/TPO that provisions for doubtful debts to be considered as operating expenses. Grant of Working Capital Adjustment - Tribunal in the case of Altimetrix India Pvt. Ltd. 2022 (7) TMI 1400 - ITAT BANGALORE there would remain no comparable uncontrolled transactions for the purpose of comparison. Transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. Comparable selection - Deselection of companies of Manipal Digital Systems Pvt. Ltd. Datamatics Business Solutions Ltd. and Infosys BPO Limited as functionally dissimilar. CES Limited is doing both BPO and KPO services - segregation of ITes services has to be categorically conducted before classifying as functionally comparable with another. In this case Revenue Authorities have only looked into the revenue earning from ITes segment and included this company as comparable. The facts remains both these companies are functionally different. We therefore direct the AO/TPO to exclude CES Limited from the final set of comparables with that of the assessee company. Ultramine Pigments Ltd - We are of the opinion that this is the initial filter on the basis of which the comparables are selected. So if a company falls this filter then it will not be selected as a comparable at the first place. Service income has to be seen at the entity level in all the cases. Hence the TPO is directed to exclude the company as comparable. As it fails the service income filter adopted by the TPO we do not find it contingent to discuss on the other allegation of the assessee on exclusion of this filter. The intangibles referred in the Asset Schedule represent the computer software. For any software company it is essential to have rights of software for coding purposes. Therefore such intangibles cannot be equated with the intangibles acquired/created by the assessee to provide specific enduring benefit. We also note that intellectual property referred to as per the annual report is amortized over its estimated useful life of 2 years. The fixed asset schedule for the year ended 31.3.2017 does not show any intellectual property. Also the assessee has failed to establish that such differences have material effect on the margin of the above company in terms of clause (i) of sub--rule (3) of Rule 10B which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences if any between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. Hence these pleas were rejected by the ld. DRP. The above findings of the ld. DRP are self-contradictory. This should be re-examined at the end of AO/TPO. Accordingly this issue is set aside to the file of AO/TPO for reconsideration. SPI Technologies Ltd. be excluded as functionally dissmilar. BNR Udyog Ltd. assessee has passed through the foreign exchange filter and it should be considered as a comparable. Crystal Voxx Ltd. - We accede to the request of the assessee s counsel and remit it back to the file of AO/TPO for fresh consideration to examine whether assessee passed through all the filters adopted by the TPO or not. The issue is remitted to the file of AO/TPO for fresh consideration. R System International Ltd. and Bhilwara Technology Ltd. issue is remitted to the file of AO/TPO for fresh consideration. ISN Global Ltd - As per the information in the annual report the company is into ITES services and functionally comparable to the assessee. Hence the ld. DRP directed the TPO to verify the financials and consider the company for inclusion if satisfies all the filters. DRP is not justified in excluding this comparable from the list of comparable. Accordingly we direct the AO/TPO to include this company ISN Global Solutions Ltd. in the list of comparables.

Summary

Issues Involved:

1. Adjustment of INR 68,97,48,330/- with respect to the international transaction.
2. Rejection of Transfer Pricing documentation.
3. Rejection of economic and comparability analysis.
4. Application of core service income filter.
5. Application of export earning filter.
6. Selection of companies based on data availability.
7. Application of different financial year ending filter.
8. Rejection of companies based on employee cost filter.
9. Consideration of upper limit on turnover.
10. Treatment of provision no longer required/written back.
11. Treatment of provision for Bad and Doubtful Debts as operating expenditure.
12. Grant of Working Capital Adjustment.
13. Exclusion and Inclusion of Comparables.

Summary:

1. Adjustment of INR 68,97,48,330/- with respect to the international transaction:
The learned AO, TPO, and DRP erred in making an adjustment of INR 68,97,48,330/- with respect to the international transaction under section 92CA of the Income-tax Act, 1961.

2. Rejection of Transfer Pricing documentation:
The learned AO, TPO, and DRP erred in rejecting the Transfer Pricing documentation maintained by the appellant by invoking provisions of sub-section (3) of section 92C of the Act.

3. Rejection of economic and comparability analysis:
The learned AO, TPO, and DRP erred in rejecting the economic and comparability analysis undertaken in the TP documentation and in conducting a fresh comparability analysis by introducing various filters for determining the Arm's Length Price (ALP) of the international transaction.

4. Application of core service income filter:
The learned AO, TPO, and DRP erred in applying the core service income filter of 75% to sales instead of 50%, leading to a narrower set of comparable companies.

5. Application of export earning filter:
The learned AO, TPO, and DRP erred in applying the export earning filter of 75% of the total sales, leading to a narrower set of comparable companies.

6. Selection of companies based on data availability:
The learned AO, TPO, and DRP erred in selecting the companies only if the data pertaining to FY 2016-17 is available in the public databases.

7. Application of different financial year ending filter:
The learned AO, TPO, and DRP erred in applying different financial year ending filter while selecting the comparable companies, thereby not considering the fact that the relevant data for the concerned financial year could be deduced from the corresponding financials.

8. Rejection of companies based on employee cost filter:
The learned AO, TPO, and DRP erred in rejecting companies having employee cost filter less than 25% of total sales.

9. Consideration of upper limit on turnover:
The learned AO, TPO, and DRP erred in not appreciating the fact that since the lower limit on the sales turnover has been universally accepted by both the appellant and TPO, a similar filter should also be applied on the upper limit on turnover while carrying out the comparability analysis.

10. Treatment of provision no longer required/written back:
The learned AO, TPO, and DRP erred in not considering provision no longer required/written back as operating in nature.

11. Treatment of provision for Bad and Doubtful Debts as operating expenditure:
The Tribunal directed the AO/TPO to treat provisions for doubtful debts as operating expenses while computing the PLI OP/OC of the comparable companies, following precedents set by previous cases.

12. Grant of Working Capital Adjustment:
The Tribunal directed the AO/TPO to grant working capital adjustment as the issue is already covered by the order of the Tribunal in the case of Altimetrix India Pvt. Ltd., considering the differences in time value of money between the tested party and potential comparables.

13. Exclusion and Inclusion of Comparables:
The Tribunal directed the AO/TPO to exclude certain comparables such as Infosys BPO Limited, SPI Technologies India Private Limited, and Eclerx Services Limited from the list of comparables and to include comparables like ISN Global Limited and Bhilwara Technology Ltd., after verifying they satisfy all the filters adopted by AO/TPO. The Tribunal also remitted some issues back to the AO/TPO for fresh consideration.