2021 (9) TMI 1139 - AT - Income Tax

Rectification u/s 254 - determination of ALP in respect of international transaction of rendering software development services by the assessee to its wholly owned holding company which was Associated Enterprise (AE) in terms of section 92 - HELD THAT - We find that the DRP in rejecting the plea of the assessee has placed reliance on the decision of M/s. Telcordia Technologies India Pvt. Ltd. 2012 (6) TMI 388 - ITAT MUMBAI and Thyssen Krupp Industries India Pvt. Ltd.I. 2013 (11) TMI 930 - ITAT MUMBAI . Both these decisions have been considered in the Bengaluru Bench of the Tribunal rendered in the case of Maxim India Integrated Circuit Design Pvt. Ltd. 2020 (11) TMI 563 - ITAT BANGALORE . Tribunal, after noticing the fact that in the decision cited in the order of the DRP, the facts were different and would result in the same effect if the claim of the assessee is accepted. Besides the above, the Karnataka High Court has also taken a view in the case of Business Process Outsourcing India Pvt. Ltd., 2018 (7) TMI 380 - KARNATAKA HIGH COURT that provision for bad and doubtful debts should be taken as operating expenses while computing profit level indicator of the comparable companies. In the light of the aforesaid decisions which have been cited at the time of hearing of the appeal, we are of the view that the claim of the assessee deserves to be accepted. Accordingly, ground No.4(h) raised by the assessee has to be allowed and is hereby allowed. Consequent to the aforesaid conclusion, portion of para 11 of the order of the Tribunal dated 24.06.2021 given in bold letters in the earlier part of this order will stand substituted by the observations made in Paragraph 6 to 10 of this order as paragraph 11.1 to 11.5 and the remaining part of paragraph 11 will stand substituted as paragraph 11.6. Miscellaneous petition is allowed to the extent indicated above.

Issues Involved:
1. Determination of Arm's Length Price (ALP) in respect of international transactions.
2. Treatment of provision for bad and doubtful debts as non-operating while computing the operating margin of comparables.
3. Whether the Tribunal made an apparent mistake in its order by not considering the ground raised by the assessee.

Issue-wise Detailed Analysis:

1. Determination of Arm's Length Price (ALP):
The Tribunal initially decided on the correctness of the ALP determination concerning the international transaction of rendering software development services by the assessee to its wholly owned holding company, an Associated Enterprise (AE) under section 92 of the Income Tax Act, 1961. The Tribunal's order did not find any grounds raised before the lower authorities regarding the treatment of provision for bad and doubtful debts as non-operating expenses, leading to the dismissal of this ground.

2. Treatment of Provision for Bad and Doubtful Debts:
The Tribunal initially dismissed the ground regarding the treatment of provision for bad and doubtful debts as non-operating in nature, stating that it was not raised before the lower authorities. However, the assessee contended that this issue was indeed raised before the Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP). The assessee provided references from the paper book to support this claim, indicating that the issue was argued before the revenue authorities.

Upon review, the Tribunal acknowledged an apparent mistake in its earlier order, recognizing that the DRP had indeed addressed the issue. The DRP had consistently held that provisions are not ascertained liabilities and should not be considered for computing business profit under the IT Act. The DRP cited several decisions, including those from the Mumbai Tribunal, which supported the view that provision for doubtful debts should be considered non-operating in nature.

3. Apparent Mistake in Tribunal's Order:
The Tribunal admitted that there was an apparent mistake in its earlier order, as the issue of treating provision for bad and doubtful debts as operating expenses was indeed raised and decided by the lower authorities. Consequently, the Tribunal proceeded to adjudicate ground No.4(h).

On the merits, the Tribunal considered several precedents, including decisions from the Bengaluru Bench and the Karnataka High Court, which supported the assessee's view that provision for bad and doubtful debts should be treated as operating expenses. The Tribunal cited cases such as Maxim India Integrated Circuit Design Pvt. Ltd. and Business Process Outsourcing India Pvt. Ltd., which held that these provisions are part of operating activities and should be included in the computation of operating profit.

The Tribunal directed the AO/TPO to consider the provision for doubtful debts as an operating expense, aligning with the decisions of the co-ordinate benches and the Karnataka High Court.

Conclusion:
The Tribunal allowed the miscellaneous petition filed by the assessee, rectifying the apparent mistake in its earlier order. The Tribunal's revised order acknowledged that the provision for bad and doubtful debts should be treated as operating expenses while computing the operating margin of comparables. The Tribunal substituted the relevant portions of its earlier order to reflect this conclusion, thereby resolving the issues raised by the assessee.

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