2019 (12) TMI 1155 - AT - Income Tax

TP Adjustment - comparable selection - exclusion of comparables, EInfochip Ltd. and Thirdware Solutions Ltd. - HELD THAT - Referring to international transactions of software development services the above two companies should be excluded from the list of comparables for the purpose of computing ALP The assessee claims that, the TP ad ustment made in this regard would have to be deleted, if these two companies are excluded from the list of comparable companies. The TPO may verify this claim of the assessee and allow the claim if found correct. In the result, this ground of the assessee is allowed for statistical purposes. Adjustment made on account of outstanding receivable in excess of 60 days, considering the outstanding receivable as a deemed loan to AE - HELD THAT - As relying on KUSUM HEALTH CARE PVT. LTD. 2017 (4) TMI 1254 - DELHI HIGH COURT we uphold the contention of the assessee that the working capital ad ustment in this case, subsumes the ad ustment that is required to be made on account of interest on outstanding receivables. Hence, this ad ustment made by the TPO is hereby deleted and this Ground of the assessee is allowed. International transaction of guarantee fees paid to Associate Enterprises (AEs) - HELD THAT - We find that the assessee has offered 1.5.% as corporate guarantee to its AEs, which is based on an internal CUP, which is the guarantee rate charged by the IDBI to the assessee company. Even under the Safe Harbor Rules, if the guarantee is provided to a subsidiary and the commission or fee declared is at the rate not less than one per cent per annum on the amount of guarantee. In this case, 1.5% rate of commission is charged by the assessee. In our view, this should be considered as at arm s length. The TPO has determined the ALP at three per cent, on an adhoc basis. After considering the facts and circumstances of the case, we direct the deletion of this adjustment as in our view. In the result, this ground of the assessee is allowed. Disallowance of bad debt and write off of sundry balances/advances - HELD THAT - Assessing Officer in the final assessment order restricted the disallowance to ₹ 12,647/- being amounts paid to employees, which cannot be recovered and amount of ₹ 3,48,645/- receivable from group entities and an amount of ₹ 15,60,871/- receivable from clients. In our view, the receivables from clients and intra group entities have definitely been routed through the profit and loss account. Otherwise they would not be trade receivables. The balances in employee accounts, who have left are also not receivables. As relying on TRF. LTD. 2010 (2) TMI 211 - SUPREME COURT we delete the disallowance in question and allow this ground of the assessee.

Summary

Issues Involved:
1. Erroneous determination of arm's length price in relation to software development services.
2. Erroneous transfer pricing adjustment on account of outstanding receivable in excess of 60 days.
3. Transfer pricing adjustment on account of guarantee fees paid to the associated enterprise.
4. Erroneous disallowance in relation to bad debt and write-off of sundry balances/advances.
5. Initiation of penalty proceedings.

Detailed Analysis:

1. Erroneous Determination of Arm's Length Price in Relation to Software Development Services:
The Tribunal found that the Transfer Pricing Officer (TPO) did not comply with the Dispute Resolution Panel's (DRP) binding directions to exclude E-Infochip Ltd. and Thirdware Solutions Ltd. from the list of comparables due to the lack of segmental data. The Tribunal referred to the case of Philips India Limited vs. DCIT, where similar companies were excluded. The Tribunal directed the exclusion of these companies from the list of comparables for computing the arm's length price (ALP) and allowed the assessee's ground for statistical purposes, subject to verification by the TPO.

2. Erroneous Transfer Pricing Adjustment on Account of Outstanding Receivable in Excess of 60 Days:
The Tribunal considered the assessee's arguments, including that no interest was charged on delayed payments from unrelated third parties and that the working capital adjustment subsumes the adjustment for interest on outstanding receivables. The Tribunal upheld the assessee's contention, citing the Delhi High Court's judgment in Pr. CIT vs. Kusum Health Care Pvt. Ltd., which held that receivables do not automatically constitute an international transaction without proper inquiry. The Tribunal deleted the adjustment made by the TPO and allowed the ground in favor of the assessee.

3. Transfer Pricing Adjustment on Account of Guarantee Fees Paid to the Associated Enterprise:
The Tribunal found that the assessee had offered a 1.5% corporate guarantee fee based on an internal Comparable Uncontrolled Price (CUP) from IDBI. The TPO's determination of a 3% rate was deemed arbitrary. The Tribunal directed the deletion of this adjustment, considering the 1.5% rate as at arm's length, and allowed the ground in favor of the assessee.

4. Erroneous Disallowance in Relation to Bad Debt and Write-Off of Sundry Balances/Advances:
The Tribunal noted that the Assessing Officer disallowed certain amounts due to lack of substantiation. However, the Tribunal found that the receivables from clients and intra-group entities were routed through the profit and loss account, and balances in employee accounts were not receivables. Citing the Supreme Court's judgment in TRF India vs. CIT, the Tribunal held that it is sufficient if bad debt is written off as irrecoverable in the accounts. The Tribunal deleted the disallowance and allowed this ground in favor of the assessee.

5. Initiation of Penalty Proceedings:
The Tribunal did not specifically address the initiation of penalty proceedings under section 271(1)(C) of the Act in the detailed analysis, implying that the primary focus was on the substantive grounds of appeal.

Conclusion:
The appeal of the assessee was allowed with directions to the TPO for verification and adjustments as specified. The Tribunal's decision emphasized compliance with DRP directions, appropriate benchmarking, and proper consideration of working capital adjustments in transfer pricing matters.