TaxTMI 
TaxTMI 
TaxTMI 
2019 (11) TMI 1112
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....37,98,111/- under the provisions of Sec.115JB of the Act. Initially, the return was processed u/s 143(1), but subsequently it was taken up for scrutiny under CASS. 2.1. During the assessment proceedings u/s 143(3) of the Act, the AO observed that the assessee had entered into international transactions during the F.Y. relevant to A.Y. before us. Therefore, for the determination of the Arm's Length Price (ALP) of the said transactions, the AO referred the matter to Transfer Pricing Officer (TPO) u/s 92CA of the Act. The TPO passed the order u/s 92CA(3) of the Act on 31/10/2016 proposing TP adjustment of Rs. 4,80,85,483/-. In accordance with such proposal, the draft assessment order dated 30.12.2016 was proposed to assess the total income at Rs. 8,02,21,873/- including the transfer pricing adjustment. The assessee filed its Objections before the Dispute Resolution Panel (DRP) Bangalore, and the DRP, vide directions dated 19.9.2017, directed the AO/TP to exclude certain companies from the final list of comparables and also granted partial relief with regard to other issues. Consequently, the final assessment order dated 28.11.2017 was passed, against which, the assessee is in appeal ....
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....ssessee in the TP documentation while determining the ALP adjustment in respect of software development services. Incorrect Operating Margin Calculation of assessee 2.9. Erred in calculating the operating profit and PLI of the assessee at Rs. 1,76,40,476/- and PLI (OP/OC) of 8.21% instead of accepting the assessee's operating margin of Rs. 6,29,96,056/- and PLI (OP/OC) of 37.18%. 2.10. Erred in calculating the incorrect operating margin of the assessee by considering certain non operating items as operating expenses. 2.10.1. Erred in considering underutilization cost of Rs. 3,03,12,062/ - as operating cost while calculating operating margin of the assessee, without appreciating the fact that the said expenditure is an extra ordinary in nature and not related with the transaction of software development service with AE. 2.10.2 Erred in considering consultancy charges of Rs. 1,05,07,684/- as operating cost while calculating operating margin of the assessee, without appreciating the fact that the same is not related to the transaction of software development service with AE. 2.10.3. Erred in considering the cost of software licenses of Rs. 14,32,799/- as operating cost, wh....
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....ormation, has turnover more than Rs. 200 crores, has high brand value and a gigantic company having super normal profits. 2.20. Erred in including "Info beans Technologies" in the final list of comparables which is functionally dissimilar and has no clear segmental information. 2.21. Erred in including "Larsen & Toubro Infotech Ltd" in the final list of comparables which is functionally dissimilar, has no clear segmental information has high brand value and is a gigantic company. Risk Adjustment and Working Capital Adjustment 2.22. Erred in calculating adjusted Arm's Length Margin (ALM) of assessee company at 23.77% (ALM at 19.96% - WCA at (-) 3.81 %) after making working capital adjustment of (-) 3.81 % and not providing for any risk adjustment by depriving off the benefit of (+)/ (-) 5% in terms of proviso to section 92C (2) of the Act. 2.22.1. Erred in not providing risk adjustment to the assessee while calculating operating margin, without appreciating the fact that the element of risk borne by the assessee company is different from that of the comparables. 2.22.2. Erred in determining the ALP at 23.77% by making negative working capital adjustment of -3.81%, wi....
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....k entry. Hence, no adjustment can be made in this regard. 4.5. Erred in aggregating the fact that the judgment of ITAT, Hyderabad in assessee's own case for the AY 2009-10, AY 2010-11 & 2011-12 directing to delete the entire addition made towards reimbursement as the same is not debited to the books of the assessee company. 5. Erred in disallowing bad debts of Rs, 21,48,81,750/- without appreciating the fact that the same is related to the sales made during the course of business and has become irrecoverable and is to be allowed as per section 36(1)(vii) of the Act. 5.1. Erred in not appreciating the fact that the bad debt referred above was offered to tax earlier years relating to services provided to CTE Inc, USA. Since the assessee's debtor CTE Inc., USA was making losses and was not able to pay debts to the assessee, the Board of Directors has decided to write off the same in the books of accounts during the year under consideration. 5.2. Erred in not following the provisions of section 36(1) (vii) of the IT Act relating to Bad debts and treated the same as capital loss, without appreciating the fact that the same is related to business of assessee, which was of....
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....e on the funds invested there from which the dividend income received. 6.2. Erred in applying Rule 8D of IT Rules, 1962 read with section 14A of the Act without recording satisfaction. 6.3. Erred in disallowing certain expenditure u/ s. 14A, without giving a finding that the expenditure by way of interest booked is not genuine and or a part of the expenditure is relatable to the investment in non-taxable income generating asset. 6.4. Erred in not appreciating the fact that the assessee has neither earned any dividend income from the investments made during the year under consideration nor was there any exemption claimed on such income. 6.5. Erred in rejecting the contention of the assessee that the borrowed funds on which interest has been paid, have been utilized for specific purpose i.e. for meeting the working capital requirements and there is no direct nexus between the loan and it's utilization for investment, the income there from which is exempt. 6.6. Erred in not appreciating the fact that the investment is made out of assessee's own funds in view of business expediency and for which purpose section 14A cannot be invoked. 6.7. Erred in not bringing any c....
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....t the comparable companies do not bear any idle costs in terms of excess staff capacity costs whereas the assessee company incurs significant idle employee cost. 12. The Ld.TPO/AO/DRP erred in not including the following 2 comparable companies, Cignity Technologies Ltd and Spry Resources India Pvt. Ltd, despite satisfying all the relevant filters for inclusion into the final comparables. 13. The Ld.TPO/ AO/DRP erred in not excluding the Larsen and Tubro Infotech Ltd, from the final set of comparables, since it is functionally dissimilar, has High turnover & no segmental information is available. 14. The Ld.TPO/ AO/DRP erred in not excluding the Persistent Systems Ltd, from the final set of comparables, although it is functionally dissimilar, engaged in software product development, no segmental information is available. 15. The Ld.TPO/ AO/DRP erred in not excluding Infobeans Technologies Ltd from the final set of comparables as it is functionally dissimilar i.e. into development of software product. 16. The Ld.TPO/AO/DRP erred in not excluding RS Software India Ltd from the final set of comparables, since it is has huge onsite expenses and is functionally dissimilar. 17....
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....ewith we submit: Each of the grounds of appeal is mutually exclusive, independent and without prejudice to other. 25. We would like to submit that as per the ratio laid down by the Hon'ble supreme Court of India in the case of National Thermal power Co. Ltd vs. CIT (1998) 229 ITR 383 (SC) the ITAT has jurisdiction to examine the question of law which though not arose before the lower authorities but arose before the ITAT for the first time. 26. The Ld.TPO/AO/DRP erred in not including Sankhya lnfotech Limited as comparable company, despite satisfying all the relevant filters for inclusion into the final comparables. 27. The ld. TPO/AO/DRP erred in not including Infomile Technologies Limited as comparable company, despite satisfying all the relevant filters for inclusion into the final comparables. 28. The assessee may add, alter or modify any other point to the Grounds of appeal at any time before or at the time of hearing of the appeal." 2.3. The Ld.DR however, opposed the admission of additional grounds of appeal stating that they are factual issues which need verification and, therefore, cannot be raised as additional grounds at this stage of the proceedings. 3. ....
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..... 35,38,541/- which is pertaining to AYs 2009-10 and 2010-11 against the tax payable and submitted that the AO, while calculating the tax payable, has not considered and has not allowed the MAT credit to the company. 5.1. Ld.DR also agreed that the same may be allowed to assessee after verification. 5.2. Therefore, we admit these grounds and deem it fit and proper to remand the issue to the file of AO for verification and allowance of MAT credit to the assessee in accordance with law. Accordingly ground nos. 21 and 22 are treated as allowed for statistical purposes. 6. As regards ground no.6, against the disallowance u/s 14A of the Act, we find that the AO has disallowed interest expenditure of Rs. 10,68,463/- u/s 14A of the Act. He has also categorically observed that the assessee has not earned any exempt income i.e. dividend income during the relevant A.Y. The Ld.Counsel for assessee submitted that the assessee company has not derived any dividend income which is exempt from tax during the relevant Previous Year (P.Y.), and, therefore, no disallowance u/s 14A is called for. In support of his contention, he placed reliance on following case laws. (i) CIT (Central) vs. Chett....
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.... amounts due from CTE Inc. USA, have been written off as a condition for sale of assessee's stock and not on the ground that they are irrecoverable. Observing that the CTE Inc. USA is a Subsidiary Company of the assessee company and that the entire dues of Rs. 28.72 crores were not written off, but only part of dues amounting to Rs. 28.41 crores was written off as a pre-condition for said sale, he held that the preconditions for allowing deduction u/s 36(1)(vii) are not fulfilled in the case of assessee. He, therefore, held that the amount so written off consequent to sale of assessee's stake in CTE Inc., is in the capital field. Thus, he held that the loss arising from such transaction is a capital loss, and, therefore, cannot be allowed as a deduction u/s 37 of the Act. Such disallowance was also made in the final assessment order and the assessee is in appeal before us. 7.1. The Ld.Counsel for the assessee submitted that the amounts receivable from CTE Inc. USA were trade receivables and because CTE Inc. was a loss making company and could not repay the same and had gone into negative net worth, a decision was taken by the Board to write off part of the debt, and accordingly pa....
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....e that the assessee filed Form no.3 CEB along with its return of income and on perusal of the same, the TPO observed that the assessee has receivables of Rs. 7,24,32,590/- at the end of the year. Assessee was, therefore, asked to submit details of raising the invoice and subsequent receipt and also proposed to charge interest @ 14.45% p.a. on such belated receipts. The assessee replied that outstanding receivables are consideration for the international transactions for providing Software Development Services, and was not in the nature of any advance or loans. He submitted that these are closely linked with services, and are linked with sales and services for the purpose of economic analysis. It was also submitted that the assessee was a fully funded entity and sales and receipts are from running accounts and working capital adjustment was worked out after considering the true impact of such outstanding receivables. It was also contended that no interest was charged even on non-AE transactions and therefore no interest should be charged on the AE transactions. 8.5. The TPO however did not accept assessee's contentions and observed that with the insertion of Explanation to S.92B o....
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....IT in ITA no. 232/Hyd/2016 (iii) Hacket Group India Ltd. In ITA no.2039/Hyd/2017 8.8. The third argument put forward is that no interest can be charged on the receivables when the assessee is not paying any interest on trade payables or advances from the non-AE customers. In support of his contention, he placed reliance upon the ITAT Hyderabad Bench decision in the case of Hacket Group India Ltd. (supra). 8.9. The fourth argument is that no interest on receivables can be charged when proceeds are received within 180 days from the date of invoice as allowed by RBI to receive the proceedings in foreign exchange. In support of this contention, he placed reliance on the following: (i) ITAT Hyderabad bench decision in the case of GSS Infotech Ltd. Vs ACIT in ITA 602/Hyd/2017; and (ii) Cura Technologies Ltd. In ITA 301/Hyd/2017 8.10. Alternatively, the Ld.Counsel for the assessee has also submitted that even if notional interest is to be charged, the same cannot be bench marked at SBI Term Deposit rates, but should be charged at Libor + interest rates, as the receivables are in foreign currency. In support of this contention, he placed reliance on the decision of ITAT in the cas....
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.... TPO for determining the ALP. 10.1. As regards the argument that the working capital adjustment takes into account the impact of interest on receivables and accordingly no separate adjustment is required, we find that in the case of the assessee the working capital adjustment is not annexed to the assessment order. Therefore we are not able to come to any conclusion whether working capital adjustment has taken into consideration, the interest on receivables. Further, the argument of the DR is at the trade receivables at the beginning and end of the year are only taken into consideration while computing working capital adjustment but not outstanding receivables during the relevant F.Y. As pointed out by the Ld.DR and also from the agreement, the credit period as agreed to between the parties is only 1 to 3 months, but the period of delay in the receivables is not given either by the TPO or by the DRP or even by the assessee before the authorities below. Period of realisation is also not given by assessee, therefore, we are not able to give any finding on the delay in realisation and we hold that when there is mentioned a Clause the agreement for credit period, it will apply and any....
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....fund g) Other payables Total Other Current Liabilities 81,372,300 1,000,000 18,700,683 - 83,286 75,939 1,645,700 102,877,908 18,700,683 20,435,773 83,286 75,939 198,567 39,494,248 11.1. Having considered the rival contentions and on perusal of records, we find that the TPO has made ALP adjustment of 23.77% to arrive at adjustment of Rs. 51,71,659/-. The Ld.DR also agreed that if it is reimbursement of expenses by assessee and not receipt by the assessee, then, adjustment cannot be made but however he submitted that this needs verification by the AO. Therefore, regarding the submissions of assessee that there are no receipts of reimbursement expenses but are paid by the assessee to its AE, we deem it fit and proper to remit the issue to the file of AO to verify whether this amount of Rs. 2,04,35,773/- is payment by assessee to its AE and if it is found to be so, no adjustment shall be made on this account. Thus, grounds of appeal no.4 and 17 are allowed. 12. As far as the TP adjustment on account of provision of SDS is concerned, the assessee has adopted TNMM as the most appropriate ....
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....iding adjustment for employees cost to comparables, the average margin of comparables would come to 6.53% as against adjustment of 11.56%. 12.5. Ld.DR, however opposed this ground by submitting that after applying the filter of 'employees cost more than 25% of total turnover' no further adjustment need be made. He submitted that even if some adjustment is made, it cannot be made to assessee's margin, but the adjustment has to be made to the margins of the comparable companies. 13. Having regard to rival contentions and material placed on record, we find that the employee cost of the assessee 65:20 against the employee cost of comparables of 54.45%. 13.1. We find that the assessee had taken this objection before the TPO but the TPO had rejected the same without making any comments on merits. Even before the DRP the assessee had raised objection no.4b, but the DRP held that extra employee cost is normal instant in this type of business and is necessitated by business dynamics. It was also held that the assessee has not furnished robust documentation to justify such claim and that there is no difference in FAR analysis as to such unusual additional cost to be met to perform its fu....