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of <h1>Bad debt provisions qualify as operating expenses with working capital adjustments allowed in transfer pricing analysis</h1> <h3>Ocwen Financial Solutions Pvt. Ltd. Versus Addl. /Joint/Dy/Asstt. Commissioner of Income Tax/ Income Tax Officer, National Faceless Assessment Centre, Delhi.</h3> Ocwen Financial Solutions Pvt. Ltd. Versus Addl. /Joint/Dy/Asstt. Commissioner of Income Tax/ Income Tax Officer, National Faceless Assessment Centre, ... Issues Involved:1. Adjustment of INR 68,97,48,330/- with respect to the international transaction.2. Rejection of Transfer Pricing documentation.3. Rejection of economic and comparability analysis.4. Application of core service income filter.5. Application of export earning filter.6. Selection of companies based on data availability.7. Application of different financial year ending filter.8. Rejection of companies based on employee cost filter.9. Consideration of upper limit on turnover.10. Treatment of provision no longer required/written back.11. Treatment of provision for Bad and Doubtful Debts as operating expenditure.12. Grant of Working Capital Adjustment.13. Exclusion and Inclusion of Comparables.Summary:1. Adjustment of INR 68,97,48,330/- with respect to the international transaction:The learned AO, TPO, and DRP erred in making an adjustment of INR 68,97,48,330/- with respect to the international transaction under section 92CA of the Income-tax Act, 1961.2. Rejection of Transfer Pricing documentation:The learned AO, TPO, and DRP erred in rejecting the Transfer Pricing documentation maintained by the appellant by invoking provisions of sub-section (3) of section 92C of the Act.3. Rejection of economic and comparability analysis:The learned AO, TPO, and DRP erred in rejecting the economic and comparability analysis undertaken in the TP documentation and in conducting a fresh comparability analysis by introducing various filters for determining the Arm's Length Price (ALP) of the international transaction.4. Application of core service income filter:The learned AO, TPO, and DRP erred in applying the core service income filter of 75% to sales instead of 50%, leading to a narrower set of comparable companies.5. Application of export earning filter:The learned AO, TPO, and DRP erred in applying the export earning filter of 75% of the total sales, leading to a narrower set of comparable companies.6. Selection of companies based on data availability:The learned AO, TPO, and DRP erred in selecting the companies only if the data pertaining to FY 2016-17 is available in the public databases.7. Application of different financial year ending filter:The learned AO, TPO, and DRP erred in applying different financial year ending filter while selecting the comparable companies, thereby not considering the fact that the relevant data for the concerned financial year could be deduced from the corresponding financials.8. Rejection of companies based on employee cost filter:The learned AO, TPO, and DRP erred in rejecting companies having employee cost filter less than 25% of total sales.9. Consideration of upper limit on turnover:The learned AO, TPO, and DRP erred in not appreciating the fact that since the lower limit on the sales turnover has been universally accepted by both the appellant and TPO, a similar filter should also be applied on the upper limit on turnover while carrying out the comparability analysis.10. Treatment of provision no longer required/written back:The learned AO, TPO, and DRP erred in not considering provision no longer required/written back as operating in nature.11. Treatment of provision for Bad and Doubtful Debts as operating expenditure:The Tribunal directed the AO/TPO to treat provisions for doubtful debts as operating expenses while computing the PLI OP/OC of the comparable companies, following precedents set by previous cases.12. Grant of Working Capital Adjustment:The Tribunal directed the AO/TPO to grant working capital adjustment as the issue is already covered by the order of the Tribunal in the case of Altimetrix India Pvt. Ltd., considering the differences in time value of money between the tested party and potential comparables.13. Exclusion and Inclusion of Comparables:The Tribunal directed the AO/TPO to exclude certain comparables such as Infosys BPO Limited, SPI Technologies India Private Limited, and Eclerx Services Limited from the list of comparables and to include comparables like ISN Global Limited and Bhilwara Technology Ltd., after verifying they satisfy all the filters adopted by AO/TPO. The Tribunal also remitted some issues back to the AO/TPO for fresh consideration.
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