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TMI Blog2022 (6) TMI 1232X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order dated 22.10.2018 passed u/s 143(3) r.w.s. 144C of the I.T.Act. The relevant assessment year is 2014-2015. 2. The assessee has raised various grounds and sub-grounds. However, during the course of hearing, the learned AR limited his submission to grounds No.4.6(d), 4.11 to 4.14, 5.1 and 5.2. The surviving grounds read as follows:- "Transfer Pricing Issue : 4.6 (d) applying only the lower turnover filter of less than INR 1 crore as a comparability criterion and not applying a higher threshold limit for turnover filter. 4.11 The learned DRP/AO/TPO have erred in law and facts by determining a transfer pricing adjustment on account of interest on outstanding receivables amounting to INR 1,20,83,994. 4.12 Without prejudice to our ground of objection 4.11 above, the learned DRP/AO/TPO have erred in law and in facts by not appreciating that the outstanding trade receivables from its AE's is arising from the provision of software development services transaction which is to be considered as closely linked to such transaction and should not be tested separately from arm's length perspective. 4.13 Without prejudice to our ground of objection 4.11 above, the learned DRP/AO/TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessing Officer (AO) incorporating the aforesaid transfer pricing adjustment. 4. Aggrieved, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide its directions dated 05.09.2018 partly allowed the objections raised by the assessee. Pursuant to the DRP's directions, final assessment order dated 22.10.2018 was passed incorporating the TP adjustment, which was re-worked out to Rs.6,76,49,378. The adjustment pertaining to corporate tax remained unchanged at Rs.74,70,129 and Rs.7,97,471. 5. Aggrieved by the final assessment order, the assessee has filed this appeal before the Tribunal. We shall first adjudicate the transfer pricing issue. Software Development Services to AE [Ground No.4.6(d)] 6. The net margin on cost earned by the assessee and the comparison of the TP analysis undertaken by the assessee and the TPO are as follows:- Net margin on cost earned by the assessee as computed by the TPO in the TP order: Particulars Amount (INR) Operating income 59,69,92,471 Operating cost 52,12,95,618 Operating profit (op. income - op. cost) 7,56,96,853 Operating / Net margin (OP/OC) 14.52 Comparison of the TP analysis undertaken by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contentions of the assessee that SQS India BFSI Limited is not comparable to the assessee and directed its exclusion. Further, the DRP accepted the contention of the assessee that CG-VAK Softwsare & Exports Limited and Sagarsoft India Limited are to be included in the comparable list. On giving effect to the DRP's direction, the list of companies selected as comparables and their arithmetical mean are as follows:- Sl No. Particulars Margin (%) 1 Infosys Limited 36.13% 2 Larsen & Toubro Infotech Limited 24.61% 3 Mindtree Limited 20.43% 4 Persistent Systems Limited 35.10% 5 RS Software (India) Limited 24.25% 6 Cigniti Technologies Limited 27.62% 7 Thirdware Solutions Limited 44.68% 8 CG-VAK Software & Exports Limited 12.33% 9 Sagarsoft India Limited 1.44% Arithmetical Mean 25.18% 6.3 Aggrieved by the TP adjustment made under the SWD segment, assessee has raised the issue before the ITAT. The learned AR limited the contention to ground No.4.6(d) mentioned above. It was submitted that the AO / TPO had excluded companies having turnover less than Rs.1 crore, however, the TPO has not put an upper limit to the turnover for exclusion of companies havin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion has been accepted by Hon'ble Bombay High Court in case of CIT vs Pentair Water Pvt.Ltd., by order dated 16/09/2015 in ITA No. 18/2015. Hon'ble Court upheld rejection of companies having turnover holding that turnover is a relevant factor in considering comparability of companies. 39. Objection raised by Ld.CIT.DR has been dealt with by this Tribunal in case of Autodesk India Pvt.Ltd. vs DCIT in (2018) 96 taxmann.com 263 for assessment year 2005-06. This Tribunal reviewed gamut of case laws to consider, whether companies having turnover more than Rs.200 crores should be regarded as comparable with a company having turnover less than 200 crore. This Tribunal held as under: "17.7 We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra)." 40. Ld.AR submitted that though this decision was rendered with reference to AY 2005- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the operational performance of the company. Therefore, receivable amounts get adjusted in the working capital adjustments, hence, another separate addition is not required under the TP provision. In this context, the learned AR relied on the ITAT order in assessee's own case for assessment year 2008-2009 in ITA No.1294/Bang/2012 (order dated 31.10.2016). 7.3 The learned Departmental Representative was duly heard. 7.4 We have heard rival submissions and perused the material on record. The Tribunal in assessee's own case for assessment year 2008-2009 (supra) 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. The relevant finding of the Tribunal in assessee's own case for assessment year 2008-2009 reads as follows:- "23. We have heard the learned Counsel for the assessee as well as learned Departmental Represe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icing Officer has made the adjustment on account of credit period provided by the assessee to the A.E. on realisation of sale proceeds. At the outset, we note that an identical issue has been considered by the co- ordinate bench of the Tribunal, Mumbai Benches, in Goldstar Jewellery Ltd. (supra), vide Para-8, held as under:- "8. We have considered the rival submissions and relevant material on record. The assessee has reported international transaction in its TP report regarding sale to its AE from manufacture of jewellery units and diamond trading unit. The TPO accepted the price charged by the assessee from AE at arm's length. However, the TPO has made the adjustment on account of notional interest for the excess period allowed by the assessee to AE for realization of dues. The TPO applied 18.816% per annum as arm's length on the over due amounts of AE and proposed adjustment of Rs. 2,49,95,139/-. The DRP though concurred with the view of the Assessing Officer/TPO on the issue of international transaction, however, the adjustment was reduced by applying the interest rate of 7% instead of 18.816% applied by the TPO. The first issue raised by the assessee is whether the aggregate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... larly in determining the price and profit involved in the transactions then those transactions can safely be regarded as closely linked transactions. In the case in hand the credit period extended to the AE is a direct result of sale transaction. Therefore no question of credit period allowed to the AE for realization of sale proceeds without having sale to AE. The credit period extended to the AE cannot be treated as a transaction stand alone without considering the main transaction of sale. The sale price of the product or service determined between the parties is always influenced by the credit period allowed by the seller. Therefore, the transaction of sale to the AE and credit period allowed in realization of sale proceeds are closely linked as they are inter linked and the terms and conditions of sale as well as the price are determined based on the totality of the transaction and not on individual and separate transaction. The approach of the TPO and DRP in analyzing the credit period allowed by the assessee to the AE without considering the main international transaction being sale to the AE will give distorted result by disregarding the price charged by the assessee from A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity costs. Working capital yields a return resulting from a) higher sales price or b) lower cost of goods sold which would have a positive impact on the operational result. Higher sales prices acts as a return for the longer credit period granted to customers. Similarly in return for longer credit period granted, a firm should be willing to pay higher purchase price which adds to the cost of goods sold. Therefore, high levels accounts receivable and inventory tend to overstate the operating results while high levels of accounts payable tend to understate them thereby necessitating appropriate adjustment. The appropriate adjustments need to be considered to bring parity in the working capital investment of the assessee and the comparables rather than looking at the receivable independently. Such working capital adjustment takes into account the impact of outstanding receivables on the profitability. In this regard, the reliance is placed on the following rulings wherein the need to undertake working capital adjustment has been appreciated by the Hon'ble Tribunals : • Mercer Consulting India Pvt. Ltd. [TS-170-ITAT-2014(DEL)] • Mentor Graphics (Noida) Private Limited [10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f after giving the necessary adjustment the international transaction of the assessee is found at arm's length then there is no question of any separate adjustment on account of allowing the credit period on the receivable from AE. We further clarify that the normal credit period allowed for the receivable from the AE shall be the credit period prevailing in the industry and therefore we are of the view that two months credit period should be taken as a normal business practice in the industry. The TPO/A.O shall also consider the benchmark interest rate as LIBOR/PLR in the light of various precedents on this issue." A similar view has been taken by this Tribunal in a series of other decisions as referred in the earlier decisions as well as relied upon by the ld. AR of the assessee. Accordingly, taking a consistent view we set aside this issue to the record of the A.O./TPO with the direction to redo the determination of ALP in respect of providing software development services by considering the proper working capital adjustment in comparable price. In case after giving the necessary adjustment the international transaction of the assessee is found at arm's length then there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We have heard rival submissions and perused the material on record. 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 (ITA No.56 of 2009). 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) 46 ITR 649. 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. 8.5 Hence, ground ..... X X X X Extracts X X X X X X X X Extracts X X X X
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