2022 (6) TMI 1232 - AT - Income Tax

TP Adjustment - comparable selection - TPO had excluded companies having turnover of less than Rs.1 crore however the AO / TPO has not put upper limit to turnover for exclusion of companies having high turnover - HELD THAT - We direct the AO / TPO to exclude the mentioned six companies Larsen Toubro Infotech Limited Mindtree Limited Persistent Systems Limited R S Software (India) Limited Infosys Systems Limited AND Thirdware Solutions Limited since it is having turnover exceeding Rs.200 crore. It is ordered accordingly. Interest on outstanding receivables from AE - TPO did not consider the assessee s submission that the trade receivables are not separate international transaction and impact if any gets subsumed by way of working capital adjustment - HELD THAT - The Tribunal in assessee s own case for assessment year 2008-2009 ( 2016 (10) TMI 1211 - ITAT BANGALORE ) had directed AO / TPO to determine afresh the ALP in respect of providing SWD services by considering the proper working capital adjustment in comparable prices. It was held by the Tribunal that in case after giving necessary adjustment the international transaction of the assessee is found to be at arm s length then there is no question of separate adjustment on account of allowing credit period from receivables from AE. Taking a consistent stand we direct the AO / TPO to redo the transfer pricing analysis in respect of interest on outstanding receivables by taking into account the directions of the Tribunal in assessee s own case. Advances to the employees against their salary for meeting expenses on food and travel while working on clients deliverables / projects - advances which could not be recovered has been written of to the profit and loss account of the assessee for the relevant assessment year and claimed as allowable expenses / business loss in terms of section 37(1) r.w.s. 28 - HELD THAT - The claim made by the assessee is not towards bad debt u/s 36(1)(vii) of the I.T.Act but under the provisions of section 28 of the I.T.Act as business or trade loss. Giving advance to the employees as well as vendors were essential and wholly and exclusively linked to the business of the assessee. The loss if any is an incidental business loss. In this context we rely on the judgment of the Hon ble Delhi High Court in the case of Triveni Engineering Industries Limited 2010 (9) TMI 26 - DELHI HIGH COURT - Further the advances given to the vendors which is non-recoverable is also allowable as business loss. This proposition has also been upheld by the Hon ble Apex Court in the case of Mysore Sugar Co. Ltd. 1962 (5) TMI 3 - SUPREME COURT . Since the A.O. has not examined the claim of deduction u/s 37(1) r.w.s. 28 of the I.T.Act we deem it appropriate to restore the issue to the files of the A.O. for de novo consideration. The assessee is directed to furnish necessary evidences before the A.O. The A.O. is directed to dispose of the matter expeditiously after affording a reasonable opportunity of hearing to the assessee. Disallowance on an adhoc basis 10% of the per diem allowance granted to the employees - company paid aggregate amount as per diem to the employees travelling for business / official purposes outside India to cover actual expenses of meals travel laundry and miscellaneous expenses etc - HELD THAT - The per diem is given to the employees to meet daily expenses for foreign travels. The expenses are reimbursed on the basis of self-declaration of the employees. Since these amounts are small amounts reimbursement are given based on the self-declaration given by the employees. Per diem allowance is very minimal amount to meet the daily need and is not disproportionate or unreasonable. In this context we rely on the judgment of the Hon ble jurisdictional High Court in the case of CIT v. Symphony Marketing Solutions India (P.) Ltd. 2016 (5) TMI 693 - KARNATAKA HIGH COURT wherein it was held that per diem allowance of 50 to 75 paid by the assessee to its employees on official trips to the USA and Europe to be reasonable We are of the view that adhoc disallowance of 10% of per diem by AO and confirmed by the DRP is uncalled for. Therefore we delete the disallowance.

Summary

Issues Involved:
1. Transfer Pricing Issue: Application of turnover filter in comparability criterion.
2. Transfer Pricing Issue: Interest on outstanding receivables from AE.
3. Corporate Tax Issue: Disallowance of advances written off.
4. Corporate Tax Issue: Ad-hoc disallowance of per diem allowance.

Detailed Analysis:

1. Transfer Pricing Issue: Application of Turnover Filter in Comparability Criterion (Ground No. 4.6(d))

The assessee challenged the application of only a lower turnover filter of less than INR 1 crore as a comparability criterion without applying a higher threshold limit for turnover filter. The Tribunal noted that the TPO excluded companies with turnover less than INR 1 crore but did not exclude companies with significantly higher turnover. The Tribunal referenced multiple judicial pronouncements, including the Hon’ble Bombay High Court in CIT v. Pentair Water Private Limited, which upheld that companies with high turnover cannot be compared to companies with significantly lower turnover. Consequently, the Tribunal directed the AO/TPO to exclude six companies from the list of comparables due to their turnover exceeding INR 200 crore. The Tribunal allowed ground No. 4.6(d).

2. Transfer Pricing Issue: Interest on Outstanding Receivables from AE (Grounds No. 4.11 to 4.14)

The TPO re-characterized trade receivables from AEs as loans and imputed interest, resulting in an adjustment of INR 1,20,83,994. The assessee argued that trade receivables should not be treated as a separate international transaction and that the impact of extended credit periods is subsumed in working capital adjustments. The Tribunal, referencing its own decision in the assessee’s case for AY 2008-2009, directed the AO/TPO to redo the transfer pricing analysis by considering proper working capital adjustments. If the international transaction is found at arm’s length after adjustments, no separate adjustment for interest on receivables is required. Grounds No. 4.11 to 4.14 were allowed for statistical purposes.

3. Corporate Tax Issue: Disallowance of Advances Written Off (Ground No. 5.1)

The assessee claimed advances written off as business/trade loss under Section 37(1) read with Section 28 of the I.T. Act. The AO disallowed the claim, treating it as bad debts not permissible under Section 36. The Tribunal held that the claim was not for bad debts but for business loss, as advances to employees and vendors were essential and linked to business operations. The Tribunal cited the Hon’ble Delhi High Court in Triveni Engineering & Industries Limited and the Hon’ble Supreme Court in Mysore Sugar Co. Ltd. to support the claim. The issue was restored to the AO for de novo consideration, directing the assessee to furnish necessary evidence. Ground No. 5.1 was allowed for statistical purposes.

4. Corporate Tax Issue: Ad-hoc Disallowance of Per Diem Allowance (Ground No. 5.2)

The AO disallowed 10% of per diem allowances granted to employees for foreign travel, citing lack of supporting evidence. The Tribunal noted that per diem allowances are minimal amounts given based on self-declaration for daily expenses during foreign travel. The Tribunal relied on the Hon’ble jurisdictional High Court in CIT v. Symphony Marketing Solutions India (P.) Ltd., which found such allowances reasonable. The Tribunal concluded that the ad-hoc disallowance was uncalled for and deleted it. Ground No. 5.2 was allowed.

Conclusion:

The appeal was partly allowed for statistical purposes, with the Tribunal directing the AO/TPO to reconsider certain adjustments and exclusions based on proper filters and judicial precedents. The Tribunal emphasized the need for proper working capital adjustments and recognized the legitimacy of business-related advances and reasonable per diem allowances.