Transfer pricing appeal partly allowed: exclusion of improper comparables, working capital adjustment allowed, bad debts and DDT remanded

The ITAT partly allowed the assessee's appeal in a transfer pricing dispute. It directed exclusion of companies that were functionally dissimilar to the assessee, which provides software development, maintenance support services and ITES to its AE, from the set of comparables. The Tribunal accepted the assessee's claim for working capital adjustment. On the treatment of provision for bad and doubtful debts and bad debts as non-operating expenditure, the matter was remanded to the AO to follow the approach adopted for AY 2014-15. Issues relating to non-grant of credit of DDT were also remanded to the AO for fresh examination based on evidence.

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Issues Involved:
1. Transfer Pricing Adjustment
2. Violation of Natural Justice
3. Selection and Rejection of Comparable Companies
4. Incorrect Margin Computation
5. Deemed International Transaction
6. Outstanding Receivables
7. Deduction under Section 80G
8. Credit of TDS and Advance Tax
9. Levy of Interest under Sections 234A, 234B, and 234C
10. Dividend Distribution Tax (DDT)
11. Working Capital Adjustment
12. Provision for Bad and Doubtful Debts

Detailed Analysis:

1. Transfer Pricing Adjustment:
The Tribunal examined the addition of Rs. 50,31,76,086 made by the TPO and upheld by the DRP. The Tribunal found that the TPO and DRP had erred in accepting certain companies as comparables and rejecting others without providing cogent reasons. The Tribunal directed the AO/TPO to exclude companies like Larsen & Toubro Infotech Ltd., Tata Elxsi Ltd., Persistent Systems Ltd., Infobeans Technologies Ltd., Aspire Systems (India) Pvt. Ltd., Infosys Ltd., and Thirdware Solutions Ltd. from the list of comparables. The Tribunal also directed to include Evoke Technologies Pvt. Ltd. as a comparable.

2. Violation of Natural Justice:
The Tribunal noted that the TPO had passed the order under section 92CA(3) without providing the appellant an opportunity of being heard, violating the principle of natural justice. The Tribunal held that such an order is bad in law and liable to be quashed.

3. Selection and Rejection of Comparable Companies:
The Tribunal addressed the selection of inappropriate comparables by the TPO and upheld by the DRP. The Tribunal excluded companies like Infosys BPO Ltd. and Eclerx Services Ltd. due to their functional dissimilarity and extraordinary events impacting their profitability. The Tribunal also directed the inclusion of Informed Technologies Ltd. after re-examination by the AO/TPO.

4. Incorrect Margin Computation:
The Tribunal found discrepancies in the computation of margins for certain comparable companies. The Tribunal directed the AO/TPO to recompute the margins for CG-VAK Software & Exports Ltd. and Aspire Systems (India) Pvt. Ltd. after factual verification.

5. Deemed International Transaction:
The Tribunal examined the transaction with CDK Global (India) Ltd., which the TPO treated as a deemed international transaction. The Tribunal remitted the issue to the TPO for reconsideration, following the decision in the assessee's own case for AY 2015-16.

6. Outstanding Receivables:
The Tribunal addressed the adjustment made by the TPO for interest on outstanding receivables. The Tribunal directed the AO/TPO to delete the impugned adjustment, following the decision in the assessee's own case for AY 2015-16.

7. Deduction under Section 80G:
The Tribunal noted that the AO had denied the deduction claimed under Section 80G without granting an opportunity of being heard to the appellant. The Tribunal remitted the issue to the AO for reconsideration after providing an opportunity to the appellant.

8. Credit of TDS and Advance Tax:
The Tribunal found that the AO had not granted the correct credit for TDS and advance tax. The Tribunal remitted the issue to the AO to verify the documentary evidence and grant the correct credit.

9. Levy of Interest under Sections 234A, 234B, and 234C:
The Tribunal addressed the levy of interest under Sections 234A, 234B, and 234C. The Tribunal remitted the issue to the AO to reconsider the levy of interest after verifying the facts and evidence provided by the appellant.

10. Dividend Distribution Tax (DDT):
The Tribunal noted that the AO had not granted credit for DDT paid by the appellant on dividends distributed to shareholders. The Tribunal remitted the issue to the AO to verify the evidence and grant the correct credit.

11. Working Capital Adjustment:
The Tribunal directed the AO/TPO to allow the working capital adjustment, following the decision in the assessee's own case for AY 2015-16.

12. Provision for Bad and Doubtful Debts:
The Tribunal addressed the treatment of provision for bad and doubtful debts as a non-operating expenditure. The Tribunal remitted the issue to the AO to decide in line with the order of ITAT in the assessee's own case for AY 2014-15.

Conclusion:
The Tribunal partly allowed the appeals for statistical purposes, directing the AO/TPO to re-examine various issues and make necessary adjustments as per the Tribunal's directions. The Tribunal emphasized the need for natural justice and proper verification of facts and evidence in determining the correct tax liability.

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