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TMI Blog2019 (12) TMI 1155X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 e-filed on 26/11/2013. While doing so, the Assessing Officer made an addition/ad ustment under the Transfer Pricing (TP) provisions of ₹ 3,19,39,211/- on the following three international transactions:- a) Software Development Services b) Outstanding receivable in excess of 60 days. c) Guarantee fees paid to the Associate Enterprises (AEs) The Assessing Officer further disallowed the claim of write off, of long term investment, and also made disallowance u/s 14A of the Act. He disallowed the claim of bad debts. 4. Aggrieved the assessee is before us on the following grounds:- 1. Erroneous determination of arm's length price in relation to software development services 1.1. On the facts and circumstances of the case and in law, the AO/ TPO erred in not following the directions of the DRP and erroneously included comparable companies for the purpose of computing the arm's length price 1.2. On the facts and circumstances of the case and in law, the AO/ TPO erred in not being consistent in the interpretation of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1. On the facts and circumstances of the case and in law, the AO/ TPO and DRP erred in concluding that the corporate guarantee issued by the Appellant in favor of AE is an international transaction 3.2. On the facts and circumstances of the case and in law, the AO/ TPO and DRP erred in not appreciating the fact that corporate guarantee extended to AE is in the nature of shareholder's activity and results in direct and proximate benefit to Appellant; 3.3. Without pre udice to the above contentions, on the facts and circumstances of the case and in law, the AO/ TPO and DRP erred in arbitrarily levying a guarantee commission of 3% and consequently making a transfer pricing ad ustment; 3.4. Without pre udice to the above contentions, on the facts and circumstances of the case and in law, the AO/ TPO and DRP erred in arbitrarily re ecting the CUP analysis as provided by Appellant without any basis i.e. a rate of 1.5% which would have paid to its bank for identical arrangement under similar circumstances; Corporate Tax grounds 4. Erroneous disallowance in relation to bad debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecord, orders of the authorities below as well as case law cited, we hold as follows:- 7. We first take up the issue of TP ad ustment made on the international transactions of software development services. We find that the TPO has not complied with the binding directions of the DRP on the issue of exclusion of comparables, EInfochip Ltd. and Thirdware Solutions Ltd. The assessee has contended that no segmental data is available in the case of both these companies which were chosen as comparable companies by the TPO. Thus, it is the case of the assessee that these companies should be excluded from the list of comparables for the purpose of computing ALP. Reliance was placed on the decision of the Kolkata Bench of the Tribunal in the case of Philips India Limited vs. DCIT in IT No. 2489/Kol/2017, order dt. 04/04/2018, wherein under similar circumstances these companies were excluded from the list of comparables. The ld. D/R, could not demonstrate that segmental data was available in the case of both these companies i.e., E-Infochip Ltd. and Thirdware Solutions Ltd. Thus, the contention of the assessee that annual report provides segmental detail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n pages 1098 to 1105 of the paper book. Moreover, the said comparable had been excluded by the order of this tribunal in assessee's own case for the Asst Year 201112. Hence we hold that the said company is functionally not comparable and hence deserves to be excluded from the final list of comparables. 13.1. With regard to Thirdware Solutions Ltd, the said company is engaged in the provision of information technology enabled services (ITES) along with software product development and provision of software development services. Segmental break up of revenue attributable to software development services and ITES is not available. The said company has significant related party transactions of 23.13% on total operating revenues. The details are enclosed in pages 1115 to 1120 of the paper book. In view of these distinguishing features vis a vis the assessee company, we hold that the same is not functionally comparable and in the absence of segmental data for determining the margin derived on account of software development services and by applying RPT filter, the said comparable deserves to be excluded from the final list of comparables. 9. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agree with the above submissions. The inclusion in the Explanation to Section 92B of the Act of the expression receivables does not mean that de hors the context every item of receivables appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studied. In other words, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis- -vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way. 11. The Court finds that the entire focus of the AO was on ust one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would ustify a TPO concluding that the figure of receivables beyond 180 days constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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. The other arguments raised by the assessee are left open for ad udication at the proper time. 13. The third ad ustment made is with respect to the international transaction of guarantee fees paid to Associate Enterprises (AEs). 14. After hearing rival contention, 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 ad ustment as in our view. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he direction of the Hon ble DRP-2, New Delhi, the claim of the assessee is partially allowed and disallowance of write-off of bad debt and sundry balances is restricted to ₹ 19,21,498/- (₹ 62,69,212- ₹ 43,47,714). 15.1.1. Thus, the 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. 15.2. The Hon ble Supreme Court in the case of TRF India vs. CIT (2010) 323 ITR 397 (SC) has held as follows:- Section 36(1)(vii) of the Income-tax Act, 1961 - Bad debts - Assessment years 199091, 1993-94 and 1994-95 - Whether after 1-4-1989, it is not necessary for assessee to establish that debt, in fact, has become irrecoverable; ..... X X X X Extracts X X X X X X X X Extracts X X X X
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