2019 (11) TMI 1112 - AT - Income Tax

TDS credit - Whether assessee was eligible for TDS credit of the amalgamating company ? - HELD THAT - We admit this ground and since we find that this issue needs verification by the AO as to whether the TDS reported in the revised return of income also contained the TDS made by M/s CTIPL, we deem it fit and proper to remand the issue to the file of the AO with a direction to verify the claim of assessee and allow the same if it is in accordance with law. Allowance of MAT credit - HELD THAT - Remand the issue to the file of AO for verification and allowance of MAT credit to the assessee in accordance with law. Disallowance u/s 14A - AO has disallowed interest expenditure - HELD THAT - We find that this issue is covered in favour of the assessee by various decisions of the Tribunal and also the judgement of Chemivest Pvt. Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT wherein it was held that no disallowance u/s 14A is called for when there is no exempt income earned by assessee during respective FY. Respectfully following the same, the disallowance made u/s 14A of the Act is directed to be deleted. Disallowance of bad debts - HELD THAT - Sum of ₹ 28,22,76,596/- was undoubtedly the outstanding trade receivables from CTE Inc. as on 31st March, 2013. The Board Resolution dated 28th December, 2012 is placed at page 630 of the paper book, which stated that it is resolved to sell the equity shares of Smart Shift Group Ltd. Mauritius to Smart Shift Group Inc. and also to write off trade receivables/bad debts due from the Subsidiary company i.e. CTE Inc. USA with respect to services provided by the company during the period October, 2011 to September, 2012 . The balance of the trade receivables were received by assessee company, apparently after sale of the shares. However, the date of sale of shares is not on record. Since what is written off as bad debts is trade receivables, we agree with the contention of the Ld.Counsel for the assessee that the nature of the transaction would not change and it is a bad debt which is not recoverable from CTE Inc. which has been written off and has to be allowed as a deduction. TP Adjustment - provision of software development services - HELD THAT - Insertion of Explanation to Sec.92B of the I.T.Act, interest on receivables has become international transaction with retrospective effect from 1.4.2002. However, even if the said insertion is to be considered as prospective in nature, since it is inserted by Finance Act, 2012, it is very much applicable to the A.Y. before us i.e. A.Y. 2013-14. The argument that the assessee has not charged interest on receivables from both AEs and Non-AEs and, therefore, no adjustment on interest receivables should be made by the TPO cannot be accepted. Both the interest on receivables as well as interest on payables are to be considered as international transactions, the AO is required to refer to the TPO for determining the ALP. As regards the argument that the working capital adjustment takes into account the impact of interest on receivables and accordingly no separate adjustment is required, we find that in the case of the assessee the working capital adjustment is not annexed to the assessment order. Therefore we are not able to come to any conclusion whether working capital adjustment has taken into consideration, the interest on receivables Argument of the DR is at the trade receivables at the beginning and end of the year are only taken into consideration while computing working capital adjustment but not outstanding receivables during the relevant F.Y. As pointed out by the Ld.DR and also from the agreement, the credit period as agreed to between the parties is only 1 to 3 months, but the period of delay in the receivables is not given either by the TPO or by the DRP or even by the assessee before the authorities below. Period of realisation is also not given by assessee, therefore, we are not able to give any finding on the delay in realisation and we hold that when there is mentioned a Clause the agreement for credit period, it will apply and any period after that period has to be taken into consideration for determining the interest on receivables. Therefore, AO/TPO has to compute the interest on receivables only of such receivables which have exceeded the credit period agreed to by the parties in the agreement and not on the entire outstanding receivables at the end of the year. Assessee s contention that the assessee is not paying interest on trade payables or advances from non-AE customers also cannot hold water after amendment by the Finance Act, 2002. Further, we also agree with the contention of the assessee that even if notional interest is to be charged, the same has to be charged at Libor interest rates as the receivables are in foreign currency. Therefore, we set aside the issue of computing interest on outstanding receivables with a direction to the TPO to consider only such receivables which are beyond the credit period agreed to by the parties in the agreement and only if such outstanding receivables have not been taken into consideration while computing the working capital adjustment and interest on such outstanding receivables shall be calculated at Libor interest rate only. Grounds allowed for statistical purposes. Adjustment on account of reimbursement of expenses received - assessee has not received any reimbursement of expenses - HELD THAT - We find that the TPO has made ALP adjustment of 23.77% to arrive at adjustment of ₹ 51,71,659/-. DR also agreed that if it is reimbursement of expenses by assessee and not receipt by the assessee, then, adjustment cannot be made but however he submitted that this needs verification by the AO. Therefore, regarding the submissions of assessee that there are no receipts of reimbursement expenses but are paid by the assessee to its AE, we deem it fit and proper to remit the issue to the file of AO to verify whether this amount is payment by assessee to its AE and if it is found to be so, no adjustment shall be made on this account. TP adjustment on account of provision of SDS - Assessee has adopted TNMM as the most appropriate method for its TP study and has arrived at 3.06% margin of a comparable companies against its own margin of 20% and, therefore, treated the transaction to be at ALP - HELD THAT - We find that the employee cost of the assessee 65 20 against the employee cost of comparables of 54.45%. We find that the assessee had taken this objection before the TPO but the TPO had rejected the same without making any comments on merits. Even before the DRP the assessee had raised objection no.4b, but the DRP held that extra employee cost is normal instant in this type of business and is necessitated by business dynamics. It was also held that the assessee has not furnished robust documentation to justify such claim and that there is no difference in FAR analysis as to such unusual additional cost to be met to perform its functions. The DRP therefore, rejected the claim of the assessee. As in the case of Petro Eraldite Pvt. Ltd. . 2018 (6) TMI 452 - BOMBAY HIGH COURT also has held that capacity adjustment was required as per Rule 10b in case of difference in capacity utilisation by assessee. In view of the same, we deem it fit and proper to set aside the issue to the file of AO/TPO with the direction to the assessee to furnish relevant documents in support of its claim and the AO/TPO shall make necessary adjustment on account of employee filter to the assessee s margin or the margin of the comparables according to the information available with the TPO. Comparable selection - HELD THAT - We find that assessee is seeking exclusion of comparable companies by relying upon various decisions of this Coordinate Bench to which we both are signatories and he is also seeking inclusion of some comparables by relying on certain decisions wherein they have been directed to be included. For A.Y. 2013-14, wherein under similar circumstances, we have directed exclusion and inclusion of these companies, we find that there would be very few companies or rather no companies at all left for the T.P. analysis subsequent to such exclusions. Under these circumstances we deem it fit and proper to remand the issue to the file of TPO with a direction to consider the precedents on this issue

Summary

Issues Involved:
1. Jurisdictional error in reference to Transfer Pricing Officer (TPO)
2. Arm’s Length Price (ALP) adjustment for software development services
3. Incorrect rejection of Transfer Pricing Documentation
4. Incorrect operating margin calculation of the assessee
5. Incorrect application of search process and filters by the TPO
6. Incorrect selection of final comparables by the TPO
7. Risk Adjustment and Working Capital Adjustment
8. Adjustment towards arms-length adjustment of receivables
9. Treatment of reimbursement of expenditure as outstanding receivables
10. Disallowance of bad debts
11. Disallowance under Section 14A of the Income Tax Act
12. Additional grounds of appeal including MAT credit and TDS credit

Detailed Analysis:

1. Jurisdictional Error in Reference to TPO:
The assessee argued that the reference to the TPO suffered from a jurisdictional error as the Assessing Officer (AO) did not record reasons for deeming it "expedient and necessary" to refer the matter to the TPO. This issue was not separately addressed in the judgment, indicating it was not considered a primary contention.

2. ALP Adjustment for Software Development Services:
The TPO proposed an ALP adjustment of ?4,61,30,226/- towards software development services provided to Cambridge Technology Enterprises Inc. The assessee contended that the adjustment was made without appreciating that the Transactional Net Margin Method (TNMM) was the most appropriate method. The Tribunal found merit in the assessee's argument and directed the TPO to reconsider the comparables and make suitable adjustments.

3. Incorrect Rejection of Transfer Pricing Documentation:
The assessee claimed that its Transfer Pricing Documentation complied with Section 92C of the Act and Rule 10D of the IT Rules. The TPO's rejection of this documentation was challenged. The Tribunal directed the TPO to reassess the documentation and provide cogent reasons if rejecting it again.

4. Incorrect Operating Margin Calculation of the Assessee:
The TPO calculated the operating profit and PLI of the assessee at ?1,76,40,476/- and PLI (OP/OC) of 8.21%. The assessee argued that the correct operating margin was ?6,29,96,056/- and PLI (OP/OC) of 37.18%. The Tribunal directed the AO to verify the operating margin calculations, particularly the inclusion of non-operating items as operating expenses.

5. Incorrect Application of Search Process and Filters by the TPO:
The assessee contended that the TPO's search process was flawed and led to the selection of functionally dissimilar comparables. The Tribunal agreed and directed the TPO to apply appropriate filters and reconsider the comparables.

6. Incorrect Selection of Final Comparables by the TPO:
The TPO included six companies as final comparables, which the assessee argued were functionally dissimilar. The Tribunal directed the TPO to exclude certain companies and reconsider the inclusion of others based on functional similarity.

7. Risk Adjustment and Working Capital Adjustment:
The Tribunal found merit in the assessee's argument that the TPO did not provide for risk adjustment and incorrectly calculated the working capital adjustment. The Tribunal directed the TPO to make appropriate adjustments considering the risk borne by the assessee and the working capital requirements.

8. Adjustment Towards Arms-Length Adjustment of Receivables:
The TPO charged interest on outstanding receivables, which the assessee argued was not warranted as no interest was charged on receivables from both AE and non-AE transactions. The Tribunal directed the TPO to consider only those receivables beyond the agreed credit period and apply Libor+ interest rates for any adjustments.

9. Treatment of Reimbursement of Expenditure as Outstanding Receivables:
The assessee contended that reimbursements payable were incorrectly treated as receivables. The Tribunal remitted the issue to the AO for verification and directed that no adjustment be made if the reimbursements were indeed payable by the assessee.

10. Disallowance of Bad Debts:
The AO disallowed bad debts of ?21,48,81,750/-, treating them as capital loss. The Tribunal found that the amounts were trade receivables written off due to the debtor's inability to pay and directed the AO to allow the deduction as bad debts.

11. Disallowance Under Section 14A of the Income Tax Act:
The AO disallowed interest expenditure of ?10,68,463/- under Section 14A despite no exempt income being earned by the assessee. The Tribunal directed the deletion of this disallowance, citing precedents where no disallowance under Section 14A is warranted in the absence of exempt income.

12. Additional Grounds of Appeal Including MAT Credit and TDS Credit:
The assessee raised additional grounds regarding MAT credit and TDS credit. The Tribunal admitted these grounds and remitted the issues to the AO for verification and allowance in accordance with the law.

Conclusion:
The Tribunal allowed the appeal partly, directing the AO and TPO to reconsider various adjustments and calculations, verify claims, and make appropriate adjustments based on the Tribunal's findings and directions. The detailed analysis ensures that the issues raised by the assessee are addressed comprehensively and in accordance with legal precedents.